Fiscal Rules and Discretion in a World Economy
53 Pages Posted: 17 Aug 2015 Last revised: 12 Mar 2017
Date Written: March 11, 2017
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: Suggested Citation