Credibility and Bias: The Case for Implementing Both a Debt Anchor and a Balanced Budget Rule

Marcela De Castro-Valderrama, Nicolas Moreno-Arias and Juan Ospina-Tejeiro
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Marcela De Castro-Valderrama: Banco de la Republica, Colombia
Nicolas Moreno-Arias: Banco de la Republica, Colombia

No 09-2023, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: Should a government have more than one fiscal rule constraining fiscal aggregates? If so, why? In this paper, we present a dynamic general equilibrium model of a small open economy featuring an incumbent government to assess how and why implementing a budget balance rule and a debt anchor rule is non-redundant and welfare-improving. Our findings suggest that the implementation of a combination of fiscal rules is optimally preferred over a single rule, as each rule has a different effect on credibility and fiscal behaviour. While the debt anchor rule prevents the propagation of the negative effects of imperfect fiscal credibility, the operational rule reduces amplification by avoiding overindebtedness and minimizing the welfare-detrimental effects arising from a deficit-biased government.

Keywords: Fiscal Rules; Credibility; Deficit Bias; Balanced Budget Rule; Debt Anchor Rule; Fiscal Policy; Welfare (search for similar items in EconPapers)
JEL-codes: E61 E62 F41 H60 H63 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2023-06-12
New Economics Papers: this item is included in nep-dge, nep-mfd and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:gii:giihei:heidwp09-2023

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