Fiscal Rules and Discretion under Limited Enforcement / Marina Halac, Pierre Yared.

Format:

Book

Author/Creator:

Halac, Marina.

Contributor:

National Bureau of Economic Research.

Yared, Pierre.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25463.

NBER working paper series no. w25463

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

We study a fiscal policy model in which the government is present-biased towards public spending. Society chooses a fiscal rule to trade off the benefit of committing the government to not overspend against the benefit of granting it flexibility to react to privately observed shocks to the value of spending. Unlike prior work, we examine rules under limited enforcement: the government has full policy discretion and can only be incentivized to comply with a rule via the use of penalties which are joint and bounded. We show that optimal incentives must be bang-bang. Moreover, under a distributional condition, the optimal rule is a maximally enforced deficit limit, triggering the largest feasible penalty whenever violated. Violation optimally occurs under high enough shocks if and only if available penalties are weak and such shocks are rare. If the rule is self-enforced in a dynamic setting, penalties take the form of temporary overspending.

Notes:

Print version record

January 2019.