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The Prince and Me A model of Fiscal Credibility

Nicolas End ()
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Nicolas End: Aix-Marseille Univ, CNRS, AMSE, Marseille, France.

No 2127, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Government fiscal actions influence forward-looking private agents' current and future decisions, which, in turn, impact fiscal performance. This paper highlights this expectation channel with a Barro-type endogenous growth model where an impatient government finances growth-enhancing spending through income taxes and public debt. Fiscal and macroeconomic outcomes emerge from the interplay of households and policymakers' preferences for public expenditure and private consumption. I find that the government's maximizing its own utility and facing an endogenous interest spread are sufficient ingredients to yield multiple equilibria, independently of the government's policy intentions. The economy almost always heads to the high public spending equilibrium, emphasizing the importance of fiscal institutions to tame government impatience and bolster fiscal credibility.

Keywords: fiscal policy; credibility; expectations (search for similar items in EconPapers)
JEL-codes: E60 H11 H30 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2021-05
New Economics Papers: this item is included in nep-mac
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