Present-biased Government, Creative Accounting and a Pitfall in Balanced Budget Rules

Marcela De Castro-Valderrama

Borradores de Economia from Banco de la Republica de Colombia

Abstract: I propose a general equilibrium model with a quasi-hyperbolic discounting government that optimally decides upon using creative accounting in order to evaluate a balanced budget rule and a debt rule. In that context, I find that a binding balanced budget rule could fail to properly constrain public overindebtedness when government uses creative accounting while a debt rule is effective, since targets are set on total public liabilities. Results suggest that a balanced budget fiscal rule can also deteriorate welfare due to the higher interest rates derived from doing operations under the line, implying future expenditure cuts that are harmful for households, who value public goods and services. A debt rule is also preferred for its capacity to reverse some welfare losses generated by the present-biased government. **** RESUMEN: En un modelo de equilibrio general con un gobierno que descuenta cuasi-hiperbólicamente se evalúan dos reglas fiscales. Los resultados sugieren que una regla fiscal sobre el balance activa y vinculante no garantiza acotar el crecimiento del endeudamiento público cuando el gobierno puede hacer trucos contables y puede generar mayores pérdidas de bienestar en la economía. Por el otro lado, una regla sobre la deuda es efectiva y logra recuperar parte de la pérdida de bienestar generada por el gobierno que descuenta cuasi-hiperbólicamente.

Keywords: Quasi-Hyperbolic Discounting; Creative Accounting; Balanced Budget Rule; Fiscal Policy; Public Overindebtness; Welfare Analysis; descuento cuasi-hiperbólico; Contabilidad Creativa; Regla Fiscal sobre el balance; Política Fiscal; Sobre endeudamiento público; Análisis de bienestar. (search for similar items in EconPapers)
JEL-codes: E21 E61 E62 G28 H61 H63 (search for similar items in EconPapers)
Pages: 45
Date: 2021-12
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://doi.org/10.32468/be.1183

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