We study the optimal design of a fiscal rule in a model in which the government is presentbiased, shocks to tax revenues make rule compliance stochastic, and a rule violation reduces the payoff from holding office. We show that: i) the benchmark policy of the social planner can be always implemented via an optimal nonlinear fiscal rule and under certain conditions even under a linear rule; ii) the optimal rule prescribes a zero structural deficit but only partially accounts for shocks; and iii) a government with a stronger ex-ante deficit bias should be granted a higher degree of flexibility.

Consistent Flexibility: Enforcement of Fiscal Rules through Political Incentives

Dotti, V.
;
2020-01-01

Abstract

We study the optimal design of a fiscal rule in a model in which the government is presentbiased, shocks to tax revenues make rule compliance stochastic, and a rule violation reduces the payoff from holding office. We show that: i) the benchmark policy of the social planner can be always implemented via an optimal nonlinear fiscal rule and under certain conditions even under a linear rule; ii) the optimal rule prescribes a zero structural deficit but only partially accounts for shocks; and iii) a government with a stronger ex-ante deficit bias should be granted a higher degree of flexibility.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10278/3742606
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