Fiscal Rules as Bargaining Chips

2020 ◽  
Author(s):  
Facundo Piguillem ◽  
Alessandro Riboni
Keyword(s):  
Bargaining Power ◽  
Fiscal Rules ◽  
Political Polarization ◽  
Outside Option ◽  
Debt Accumulation ◽  
Power Fluctuations ◽  
Balanced Budget Rule ◽  
Balanced Budget ◽  
Government Shutdown

Abstract Most fiscal rules can be overridden by consensus. We show that this does not make them ineffectual. Since fiscal rules determine the outside option in case of disagreement, the opposition uses them as “bargaining chips” to obtain spending concessions. We show that under some conditions this political bargain mitigates the debt accumulation problem. We analyze various rules and find that when political polarization is high, harsh fiscal rules (e.g., government shutdown) maximize the opposition’s bargaining power and lead to lower debt accumulation. When polarization is low, less strict fiscal limits (e.g, balanced-budget rule) are preferable. Moreover, we find that the optimal fiscal rules could arise in equilibrium by negotiation. Finally, by insuring against power fluctuations, negotiable rules yield higher welfare than hard ones.

scholarly journals Rising Government Debt: Causes and Solutions for a Decades-Old Trend

2019 ◽  
Vol 33 (2) ◽  
pp. 115-140 ◽  
Author(s):  
Pierre Yared
Keyword(s):  
World War Ii ◽  
Government Debt ◽  
Time Inconsistency ◽  
Fiscal Rules ◽  
Political Polarization ◽  
Macroeconomic Shocks ◽  
Debt Accumulation ◽  
Long Run ◽  
Advanced Economies ◽  
Electoral Uncertainty

Over the past four decades, government debt as a fraction of GDP has been on an upward trajectory in advanced economies, approaching levels not reached since World War II. While normative macroeconomic theories can explain the increase in the level of debt in certain periods as a response to macroeconomic shocks, they cannot explain the broad-based long-run trend in debt accumulation. In contrast, political economy theories can explain the long-run trend as resulting from an aging population, rising political polarization, and rising electoral uncertainty across advanced economies. These theories emphasize the time-inconsistency in government policymaking, and thus the need for fiscal rules that restrict policymakers. Fiscal rules trade off commitment to not overspend and flexibility to react to shocks. This tradeoff guides design features of optimal rules, such as information dependence, enforcement, cross-country coordination, escape clauses, and instrument versus target criteria.

scholarly journals Present-biased Government, Creative Accounting and a Pitfall in Balanced Budget Rules

2021 ◽  
Author(s):  
Marcela De Castro-Valderrama
Keyword(s):  
General Equilibrium ◽  
Interest Rates ◽  
Equilibrium Model ◽  
Hyperbolic Discounting ◽  
Goods And Services ◽  
Creative Accounting ◽  
Welfare Losses ◽  
Fiscal Rule ◽  
Balanced Budget Rule ◽  
Balanced Budget

I propose a general equilibrium model with a quasi-hyperbolic discounting government that optimally decides upon using creative accounting in order to evaluate a balanced budget rule and a debt rule. In that context, I find that a binding balanced budget rule could fail to properly constrain public overindebtedness when government uses creative accounting while a debt rule is effective, since targets are set on total public liabilities. Results suggest that a balanced budget fiscal rule can also deteriorate welfare due to the higher interest rates derived from doing operations under the line, implying future expenditure cuts that are harmful for households, who value public goods and services. A debt rule is also preferred for its capacity to reverse some welfare losses generated by the present-biased government.

The Motive to Borrow

2019 ◽  
pp. 102-150 ◽  
Author(s):  
Antonio Fatás ◽  
Atish R. Ghosh ◽  
Ugo Panizza ◽  
Andrea F. Presbitero
Keyword(s):  
Asset Management ◽  
Public Debt ◽  
Causal Link ◽  
Fiscal Rules ◽  
Output Volatility ◽  
Lower Growth ◽  
Fiscal Stimulus ◽  
Debt Accumulation ◽  
Strategic Manipulation ◽  
Tax Smoothing

Governments issue debt for good and bad reasons. While the good reasons—intertemporal tax smoothing, fiscal stimulus, and asset management—can explain some of the increases in public debt observed in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing and budgetary institutions and fiscal rules can play a role in mitigating the tendency to overborrow. While it is difficult to establish a clear causal link from high public debt to low growth, it is likely that some countries might be paying a price in terms of lower growth and greater output volatility because of excessive debt accumulation.

The Fiscal Compact: Europe's Not Always Able to Speak German: On the Dutch Implementing Act and the Hazardous Interpretation of the Implementation Duty in Article 3(2) Fiscal Compact

2013 ◽  
Vol 9 (3) ◽  
pp. 480-500 ◽  
Author(s):  
Jan-Herman Reestman
Keyword(s):  
The Netherlands ◽  
Automatic Correction ◽  
Fiscal Compact ◽  
Balanced Budget Rule ◽  
Balanced Budget

Fiscal Compact: duty to implement balanced budget rule, automatic correction mechanism and independent budget supervisor in national law – The Netherlands: Act on sustainable government finances – Act does not bind the (budget) legislature – Conformity with the implementation duty in Article 3(2) Fiscal Compact? – The first reading of Article 3(2) – The second reading of Article 3(2) – The genesis of Article 3(2) – Recourse to (Dutch and French) monism?

The ‘German Way’ of Curbing Public Debt

2015 ◽  
Vol 11 (01) ◽  
pp. 30-54 ◽  
Author(s):  
Alexander Thiele
Keyword(s):  
Financial Crisis ◽  
Public Debt ◽  
Historical Background ◽  
Wrong Answer ◽  
Debt Brake ◽  
Economic Problems ◽  
Fiscal Compact ◽  
Germany Introduction ◽  
Balanced Budget Rule ◽  
Balanced Budget

Public debt: relevance for funding of modern states – Keynesian revolution – Consequences of the financial crisis in Germany – Introduction of the debt brake and Fiscal Compact – The constitutional debt brake: structure and exceptions of the balanced budget rule, four deficiencies of the debt brake – The Fiscal Compact: historical background and structure of the balanced budget rule – Sufficient implementation of the balanced budget rule in Germany? – Constitutionality of the Fiscal Compact? – Austerity as the wrong answer for solving the current economic problems

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