Rethinking fiscal rules

Luis Carranza (), Julian Diaz Saavedra () and Jose Enrique Galdon-Sanchez
Additional contact information
Julian Diaz Saavedra: Department of Economic Theory and Economic History, University of Granada.
Jose Enrique Galdon-Sanchez: Universidad Publica de Navarra.
Authors registered in the RePEc Author Service: Julián Díaz-Saavedra

No 21/14, ThE Papers from Department of Economic Theory and Economic History of the University of Granada.

Abstract: The Covid 19 pandemic has caused both a decrease in tax revenues and an increase in public spending, forcing governments to increase fiscal deficits to unprecedented levels. Given these circumstances, it is foreseeable that fiscal rules will play a predominant role in the design of many countries’ recovery policies. We develop a general equilibrium, overlapping generations model for a small, open economy in order to study the impact of several fiscal rules upon welfare, public expenditures and growth. We calibrate the model to the Peruvian economy. In this economy, fiscal rules have been widely used and, unlike in other Latin American countries, they have been relatively successful. We find that fiscal rules will generate better results in terms of output and welfare if, in addition to maintaining control over the fiscal result, they also eliminate the bias in favor of current expenditure. We also find that the performance of economies that implement structural rules tends to be better than the performance of economies that implement rules based on current results.

Keywords: Fiscal policy; Infrastructure; Public spending; Public Deficit; Debt limits. (search for similar items in EconPapers)
JEL-codes: E62 H54 O23 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2021-12-03
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-mac and nep-pbe
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Journal Article: Rethinking fiscal rules (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:gra:wpaper:21/14

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