Consistent flexibility: Enforcement of deficit rules through political incentives

Valerio Dotti and Eckhard Janeba

European Journal of Political Economy, 2023, vol. 79, issue C

Abstract: We study the optimal design of a deficit rule in a model in which the government is present-biased, shocks to tax revenues make rule compliance stochastic, and a rule violation reduces the payoff from holding office. We show that: (i) the benchmark policy of the social planner can be always implemented via an optimal nonlinear deficit rule and under certain conditions even under a linear rule; (ii) the optimal rule prescribes a zero structural deficit but only partially accounts for shocks; and (iii) a government with a stronger ex-ante deficit bias should be granted a higher degree of flexibility.

Keywords: Fiscal rules; Flexibility; Policy design; Deficit bias (search for similar items in EconPapers)
JEL-codes: D02 D72 E6 H2 H6 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:79:y:2023:i:c:s0176268023000939

DOI: 10.1016/j.ejpoleco.2023.102449

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