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Rousseau's social contract or Machiavelli's virtue? A measure of fiscal credibility

Nicolas End

No 2042, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: The concept of fiscal credibility is a watermark of some of the fiscal policy literature, but beyond an intuitive parallel with monetary policy, it remains not well defined, nor measured. This paper provides an explicit measure of fiscal credibility, based on the anchoring of private expectations onto official targets. I document how credibility varies among a sample of 26 European countries and evolves over 1995-2019. I find that private agents do not trust all governments uniformly. Country differences are mainly driven by past fiscal performance and institutions (fiscal rules and councils). Conversely, I find that credibility impacts sovereign financing conditions, as well as macroeconomic performance. Governments should thus strive to be (à la Rousseau) or appear (à la Machiavelli) credible.

Keywords: fiscal policy; credibility (search for similar items in EconPapers)
JEL-codes: E60 H11 H30 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2020-12
New Economics Papers: this item is included in nep-mac and nep-soc
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