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Fiscal Rules as Bargaining Chips

Facundo Piguillem () and Alessandro Riboni ()

No 2018-02, Working Papers from Center for Research in Economics and Statistics

Abstract: Most fiscal rules can be overridden by consensus. We show that this does not make them ine ectual. Since fiscal rules determine the outside option in case of disagreement, the opposition uses them as "bargaining chips" to obtain spending concessions. This political bargain reduces the debt accumulation problem. We analyze various rules and show that when political polarization is high, a government shutdown maximizes the opposition's bargaining power and leads to a sizeable debt reduction. When polarization is low, a balanced budget is preferable. Mandatory spending eliminates debt accumulation by removing political risk. However, it generates persistent static ineffciencies.

Keywords: fiscal rules; government debt; legislative bargaining; political polarization; government shutdown; mandatory spending (search for similar items in EconPapers)
JEL-codes: H2 H6 D72 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2018-03-08
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-pol
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Related works:
Working Paper: Fiscal Rules as Bargaining Chips (2020) Downloads
Working Paper: Fiscal Rules as Bargaining Chips (2018) Downloads
Working Paper: Fiscal Rules as Bargaining Chips (2018) Downloads
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