Fiscal Rules and Discretion in a World Economy

Marina Halac and Pierre Yared

American Economic Review, 2018, vol. 108, issue 8, 2305-34

Abstract: Governments are present-biased toward spending. Fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks. We compare coordinated rules, chosen jointly by a group of countries, to uncoordinated rules. If governments' present bias is small, coordinated rules are tighter than uncoordinated rules: individual countries do not internalize the redistributive effect of interest rates. However, if the bias is large, coordinated rules are slacker: countries do not internalize the disciplining effect of interest rates. Surplus limits enhance welfare, and increased savings by some countries or outside economies can hurt the rest.

JEL-codes: D82 E43 E62 H62 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/aer.20151180
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Citations: View citations in EconPapers (40)

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Working Paper: Fiscal Rules and Discretion in a World Economy (2018)
Working Paper: Fiscal Rules and Discretion in a World Economy (2015)
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