Fiscal Rules, Bailouts, and Reputation in Federal Governments

Alessandro Dovis and Rishabh Kirpalani

No 23942, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E40 E6 E61 F5 H6 H7 (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-gth, nep-mac and nep-ure
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Citations: View citations in EconPapers (20)

Published as Alessandro Dovis & Rishabh Kirpalani, 2020. "Fiscal Rules, Bailouts, and Reputation in Federal Governments," American Economic Review, vol 110(3), pages 860-888.

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