We study the optimal design of a deficit rule in a model in which the government is present-biased, 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 deficit 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 deficit rules through political incentives
Dotti, Valerio
Formal Analysis
;Janeba, EckhardWriting – Original Draft Preparation
2023-01-01
Abstract
We study the optimal design of a deficit rule in a model in which the government is present-biased, 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 deficit 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.File in questo prodotto:
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