Discussion Paper Details

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Title: Fiscal Rules and Discretion in a World Economy

Author(s): Marina Halac and Pierre Yared

Publication Date: January 2018

Keyword(s): Asymmetric and Private Information, institutions, Macroeconomic Policy, political economy and Structure of Government

Programme Area(s): International Macroeconomics and Finance

Abstract: Governments are present-biased toward spending. Fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks. We compare coordinated rules -- chosen jointly by a group of countries -- to uncoordinated rules. If governments' present bias is small, coordinated rules are tighter than uncoordinated rules: individual countries do not internalize the redistributive effect of interest rates. However, if the bias is large, coordinated rules are slacker: countries do not internalize the disciplining effect of interest rates. Surplus limits enhance welfare, and increased savings by some countries or outside economies can hurt the rest.

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Bibliographic Reference

Halac, M and Yared, P. 2018. 'Fiscal Rules and Discretion in a World Economy'. London, Centre for Economic Policy Research.