A Theory of Fiscal Responsibility and Irresponsibility / 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. w30601.

NBER working paper series no. w30601

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

We propose a political economy mechanism that explains the presence of fiscal regimes punctuated by crisis periods. Our model focuses on the interaction between successive deficit-biased governments subject to i.i.d. fiscal shocks. We show that the economy transitions between a fiscally responsible regime and a fiscally irresponsible regime, with transitions occurring during crises when fiscal needs are large. Under fiscal responsibility, governments limit their spending to avoid transitioning to fiscal irresponsibility. Under fiscal irresponsibility, governments spend excessively and precipitate crises that lead to the reinstatement of fiscal responsibility. Regime transitions can only occur if governments' deficit bias is large enough.

Notes:

Print version record

October 2022.