Optimal Fiscal Spending and Deviation Rules under Political Uncertainty

Ryo Arawatari () and Tetsuo Ono
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Ryo Arawatari: Faculty of Economics, Doshisha University

No 24-03, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper characterizes optimal fiscal rules within a model integrating fiscal rule deviations in a two-period political turnover framework. The incumbent party aims to secure favored spending through increased debt issuance due to potential power loss. The study introduces spending and deviation rules, requiring legislative approval for deviations from the spending rule. Analysis shows the optimal deviation rule, favoring flexible responses to stringent spending rules. Furthermore, larger initial debt balances warrant tighter spending rules, while the optimal deviation rule remains unaffected. Additionally, political conflict inf luences deviation rule permissiveness, aligning more with the incumbent party’s preferences as conflicts escalate.

Keywords: Fiscal rules; Government debt; Political turnover. (search for similar items in EconPapers)
JEL-codes: D72 D78 H62 H63 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2024-03
New Economics Papers: this item is included in nep-cdm and nep-pol
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