The Prince and Me A model of Fiscal Credibility

Nicolas End

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Abstract: Government fiscal actions influence forward-looking private agents' current and future decisions, which, in turn, impact fiscal performance. This paper highlights this expectation channel with a Barro-type endogenous growth model where an impatient government finances growth-enhancing spending through income taxes and public debt. Fiscal and macroeconomic outcomes emerge from the interplay of households and policymakers' preferences for public expenditure and private consumption. I find that the government's maximizing its own utility and facing an endogenous interest spread are sufficient ingredients to yield multiple equilibria, independently of the government's policy intentions. The economy almost always heads to the high public spending equilibrium, emphasizing the importance of fiscal institutions to tame government impatience and bolster fiscal credibility.

Keywords: fiscal policy; credibility; expectations (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-mac
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03222115
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Working Paper: The Prince and Me A model of Fiscal Credibility (2021)
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