Fiscal Policy with Limited-Time Commitment

Alex Clymo and Andrea Lanteri

The Economic Journal, 2020, vol. 130, issue 627, 623-652

Abstract: We propose a theory of optimal fiscal policy with 'Limited-Time Commitment'. In our framework, successive governments have commitment only over finite, overlapping horizons. We first show that key results in the 'Full Commitment' literature can often be sustained with a single period of commitment. We then solve a calibrated model in which 'Limited-Time Commitment' fails to implement the 'Full Commitment' policy, and find that one year (three years) of commitment recovers one-third (two-thirds) of the welfare losses relative to 'No Commitment'. Finally, we investigate the trade-off between commitment and flexibility in response to shocks.

Date: 2020
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Citations: View citations in EconPapers (5)

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Working Paper: Fiscal Policy with Limited-Time Commitment (2016)
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