Signaling Fiscal Regime Sustainability

F. Drudi and Alessandro Prati

Working Papers from Banca Italia - Servizio di Studi

Abstract: This paper proposes a signaling model of fiscal stabilizations that offers a new perspective on why governments deviate from optimal tax smoothing. In our model, dependable -but not fully credible- governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock debt has been accumulated). At this point, they may deviate from tax smoothing in order to avoid being mimicked by weak governments. We show that a testable prediction of our model is that primary balances and debt stocks are complementary inputs in the credit rating function and we sucessfully test it on Irish , Belgian, and Danish data from the late 1970s to the early 1990s.

Keywords: FISCAL POLICY; TAX POLICY; GOVERNMENT POLICY (search for similar items in EconPapers)
JEL-codes: E62 H2 (search for similar items in EconPapers)
Date: Written
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Related works:
Working Paper: Signaling Fiscal Regime Sustainability (1999)
Journal Article: Signaling fiscal regime sustainability (2000)
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Persistent link: http://EconPapers.repec.org/RePEc:fth:banita:335

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