Fiscal Rules, Bailouts, and Reputation in Federal Governments

51 Pages Posted: 23 Oct 2017

See all articles by Alessandro Dovis

Alessandro Dovis

Pennsylvania State University

Rishabh Kirpalani

University of Wisconsin - Madison

Date Written: October 2017

Abstract

Expectations of transfers by central governments incentivize overborrowing by local governments. In this paper, we ask if fiscal rules can reduce overborrowing if central governments cannot commit. We study a model in which the central government’s type is unknown and show that fiscal rules increase overborrowing if the central government’s reputation is low. In contrast, fiscal rules are effective in lowering debt if the central government’s reputation is high. Even when the central government’s reputation is low, binding fiscal rules will arise in the equilibrium of a signaling game.

Suggested Citation

Dovis, Alessandro and Kirpalani, Rishabh, Fiscal Rules, Bailouts, and Reputation in Federal Governments (October 2017). NBER Working Paper No. w23942, Available at SSRN: https://ssrn.com/abstract=3057173

Alessandro Dovis (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Rishabh Kirpalani

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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