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Fiscal Rules as Bargaining Chips

Facundo Piguillem () and Alessandro Riboni ()

No 14682, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Most fiscal rules can be overridden by consensus. We show that this does not make them ineffectual. Since fiscal rules determine the outside option in case of disagreement, the opposition uses them as ``bargaining chips" to obtain spending concessions. We show that under some conditions this political bargain mitigates the debt accumulation problem. We analyze various rules and find that when political polarization is high, harsh fiscal rules (e.g., government shutdown) maximize the opposition's bargaining power and leads to lower debt accumulation. When polarization is low, less strict fiscal limits (e.g, balanced-budget rule) are preferable. Moreover, we find that the optimal fiscal rules could arise in equilibrium by negotiation. Finally, by insuring against power fluctuations, negotiable rules yield higher welfare than strict ones.

Keywords: fiscal rules; Government Debt; Government shutdown=; legislative bargaining; Political Polarization (search for similar items in EconPapers)
JEL-codes: D72 H2 H6 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-cdm, nep-gth, nep-mac, nep-mic and nep-pol
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Working Paper: Fiscal Rules as Bargaining Chips (2018) Downloads
Working Paper: Fiscal Rules as Bargaining Chips (2018) Downloads
Working Paper: Fiscal Rules as Bargaining Chips (2018) Downloads
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