Fiscal Rules and Discretion in a World Economy

54 Pages Posted: 25 Aug 2015 Last revised: 22 Sep 2024

See all articles by Marina Halac

Marina Halac

Columbia University

Pierre Yared

Columbia University - Columbia Business School, Finance

Date Written: August 2015

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.

Suggested Citation

Halac, Marina and Yared, Pierre, Fiscal Rules and Discretion in a World Economy (August 2015). NBER Working Paper No. w21492, Available at SSRN: https://ssrn.com/abstract=2649782

Marina Halac (Contact Author)

Columbia University ( email )

Pierre Yared

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
Uris Hall
New York, NY 10027
United States

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