Optimal Fiscal Rules
14 Pages Posted: 18 Mar 2017
Date Written: March 26, 2013
This paper studies the welfare effect of restrictions imposed on government debt and deficit. The analysis is conducted in a sovereign default framework with endogenous default decisions. In addition to the conventional exponential discounting preferences the paper also studies a specification, in which agents have self-control problems. The results show that debt ceilings increase welfare for both types of preferences, while deficit restrictions have negative effect for exponential discounting model and positive effect for the model with time-inconsistent preferences.
Keywords: Sovereign Default, Fiscal Rules, Overborrowing, Hyperbolic Discounting
JEL Classification: D91, E32, F34, F41
Suggested Citation: Suggested Citation