The political economy of balanced-budget rules

Jerome Creel () and Etienne Farvaque ()
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Etienne Farvaque: Université de Lille

No 2009-06, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: The paper first reviews the evolution of federal fiscal rules in the United States, showing a trend towards balanced-budget rules, not golden rules. An explanation to this trend is provided in a model that includes voter's preferences that are skewed by the history of the budget structure, and fiscal rules on the budget. Previous results in the literature are generalized, and the implications of fiscal rules for the use of debt as a strategic asset in the hands of politicians are derived. The inclusion of a golden rule of public finance is compared with that of a balanced-budget rule. Because of the presence of habits, we show that politicians are more prone to adopt balanced-budget rules than a golden rule.

Keywords: Budget deficit; debt; political economy; fiscal rules; habit effect (search for similar items in EconPapers)
JEL-codes: D72 D78 H62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-pbe, nep-pke and nep-pol
Date: 2009
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Persistent link: http://EconPapers.repec.org/RePEc:fce:doctra:0906

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