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Rules versus discretion in fiscal policy

Carlo Bianchi () and Mario Menegatti

No 2007-EP05, Economics Department Working Papers from Department of Economics, Parma University (Italy)

Abstract: This paper purports to apply the Kydland-Prescott framework of dynamic inconsistency to the case of fiscal policy, by considering the trade-off between output and debt stabilization. The Government budget constraint provides the link between debt dynamics and the level of activity, influenced by fiscal policy. Contrary to what happens in the monetary policy framework, however, a commitment is not always superior to discretion, even in the absence of uncertainty, but only when the public debt-GDP ratio is sufficiently large. The introduction of uncertainty, as usual, implies a reduction in the net benefit generated by the adoption of a fixed rule.

Keywords: rules; discretion; time inconsistency; fiscal policy (search for similar items in EconPapers)
JEL-codes: E61 E62 H62 H63 H68 (search for similar items in EconPapers)
Pages: 27
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-mac and nep-pbe
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Related works:
Journal Article: RULES VERSUS DISCRETION IN FISCAL POLICY (2012) Downloads
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