Fiscal targeting

Régis Barnichon and Geert Mesters

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Fiscal rules are widely used to constrain policy decisions and promote fiscal discipline, but the design of flexible yet effective rules has proved a formidable task. In this paper, we propose to implement fiscal constraints through a fiscal targeting framework, paralleling central banks' move from monetary rules to inflation targeting. Under fiscal targeting, fiscal policy makers must optimally balance some fiscal objectives (e.g., keeping the deficit below 3%) with their own policy objectives (e.g., stabilizing output at potential). Fiscal targeting can be implemented with minimal assumption on the underlying economic model, and it promises a number of benefits over commonly used fiscal rules: (i) stronger buy-in from policy makers, (ii) higher fiscal discipline, (iii) transparency and ease of monitoring.

Keywords: Fiscal rule; impulse responses; forecasting; stability and growth pact. (search for similar items in EconPapers)
JEL-codes: C14 C32 E32 E52 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-eec and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1793

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