The Political Economy of Balanced-Budget Rules

15 Pages Posted: 25 Jul 2009

See all articles by Jerome Creel

Jerome Creel

Observatoire Francais des Conjonctures Economiques (OFCE); ESCP Europe

Etienne Farvaque

University of Lille I - Department of Economics and Management; Lille Economie & Management (LEM) UMR 9221

Date Written: July 23, 2009

Abstract

The paper provides an explanation to the adoption of balanced-budget rules by politicians, instead of golden rules. In a model that includes voters' preferences that are skewed by the history of the budget structure, and fiscal rules on the budget, we show that incumbents favor a distorted budget allocation, and use debt strategically. The inclusion of a golden rule of public finance is compared with that of a balanced-budget rule. Due to the presence of habits, we show that the conditions for the prevalence of a balanced-budget rule are easier to fulfil than those pertaining to a golden rule.

Keywords: budget deficit, debt, political economy, fiscal rules, habit effect

JEL Classification: D72, D78, H62

Suggested Citation

Creel, Jerome and Farvaque, Etienne and Farvaque, Etienne, The Political Economy of Balanced-Budget Rules (July 23, 2009). Available at SSRN: https://ssrn.com/abstract=1438024 or http://dx.doi.org/10.2139/ssrn.1438024

Jerome Creel (Contact Author)

Observatoire Francais des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75007
France
+33 1 44 18 54 78 (Fax)

ESCP Europe ( email )

79, avenue de la République
Paris, 75011
France

Etienne Farvaque

University of Lille I - Department of Economics and Management ( email )

Villeneuve D'Ascq Cedex, 59655
France

Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

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