Fiscal Rules and Discretion in a World Economy

53 Pages Posted: 17 Aug 2015 Last revised: 12 Mar 2017

See all articles by Marina Halac

Marina Halac

Columbia Business School - Finance and Economics

Pierre Yared

Columbia Business School - Finance and Economics

Date Written: March 11, 2017

Abstract

Governments are present-biased toward spending. Fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks. We compare coordinated rules --- chosen jointly by a group of countries --- to uncoordinated rules. If governments' present bias is small, coordinated rules are tighter than uncoordinated rules: individual countries do not internalize the redistributive effect of interest rates. However, if the bias is large, coordinated rules are slacker: countries do not internalize the disciplining effect of interest rates. Surplus limits enhance welfare, and increased savings by some countries or outside economies can hurt the rest.

Keywords: Institutions, Asymmetric and Private Information, Macroeconomic Policy, Structure of Government, Political Economy

JEL Classification: D02, D82, E60, H10, P16

Suggested Citation

Halac, Marina and Yared, Pierre, Fiscal Rules and Discretion in a World Economy (March 11, 2017). Columbia Business School Research Paper No. 15-72. Available at SSRN: https://ssrn.com/abstract=2645248 or http://dx.doi.org/10.2139/ssrn.2645248

Marina Halac

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Pierre Yared (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
Uris Hall
New York, NY 10027
United States

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