The hidden compliance zone of fiscal rules

Francisco Parro

Applied Economics Letters, 2023, vol. 30, issue 12, 1661-1670

Abstract: This paper studies fiscal rule compliance under uncertainty and irreversibility. I show that a broad class of fiscal rule designs contain a state space in which the government optimally complies with the rule in place, a compliance zone. Outside the compliance zone, the government exerts control on the path committed by the rule. I also show that the size of the rule’s compliance zone depends on two elements: first, how the rule copes with the uncertainty regarding the macro variable that underlies it; and second, how the fiscal spending path committed by the rule accommodates the demand for public goods.

Date: 2023
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DOI: 10.1080/13504851.2022.2078771

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