DP12570 Fiscal Rules and Discretion in a World Economy
|Author(s):||Marina Halac, Pierre Yared|
|Publication Date:||January 2018|
|Keyword(s):||Asymmetric and Private Information, institutions, Macroeconomic Policy, political economy, Structure of Government|
|JEL(s):||D02, D82, E60, H10, P16|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12570|
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.