Consistent Flexibility: Enforcement of Fiscal Rules through Political Incentives

Valerio Dotti and Eckhard Janeba

No 8440, CESifo Working Paper Series from CESifo

Abstract: We study the optimal design of a fiscal rule in a model in which the government is present-biased, shocks to tax revenues make rule compliance stochastic, and a rule violation reduces the payoff from holding office. We show that: i) the benchmark policy of the social planner can be always implemented via an optimal nonlinear fiscal rule and under certain conditions even under a linear rule; ii) the optimal rule prescribes a zero structural deficit but only partially accounts for shocks; and iii) a government with a stronger ex-ante deficit bias should be granted a higher degree of flexibility.

Keywords: fiscal rules; flexibility; policy design; deficit bias (search for similar items in EconPapers)
JEL-codes: D02 D72 E60 H20 H60 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-mac
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