Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies

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Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies

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Giancarlo Corsetti
Nouriel Roubini

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Abstract

In this paper we reconsider the trade-off between rules and discretion in fiscal policy in the presence of politically motivated fiscal deficits. We present a model of political bias in the budget process appropriately developed to allow for tax-smoothing-motivated deficits as well as for the consideration of deficit biases in open economies. We find that endowing politically-biased governments with the ability to respond to economic shocks with deficit finance will not exacerbate the existing biases. In an open economy, the ability to borrow abroad will significantly increase the deficit. However, restrictions to public foreign borrowing will not reduce the political bias as long as the private sector has access to international capital markets at the same terms as the government. Copyright 1997 Blackwell Publishers Ltd..

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Publisher Info
Article provided by Blackwell Publishing in its journal Economics and Politics.

Volume (Year): 9 (1997)
Issue (Month): 1 (03)
Pages: 27-54
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Handle: RePEc:bla:ecopol:v:9:y:1997:i:1:p:27-54

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Paper
- Giancarlo Corsetti & Nouriel Roubini, 1995. "Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies," Working Papers 95-21, New York University, Leonard N. Stern School of Business, Department of Economics.

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Maxwell Opoku-Afari, . "Capital Flows and Current Account Sustainability: The Ghanaian Experience," Discussion Papers 07/07, University of Nottingham, CREDIT. [Downloadable!]
Battaglini, Marco & Coate, Stephen, 2007. "A Dynamic Theory of Public Spending, Taxation and Debt," Working Papers 07-04, Cornell University, Center for Analytic Economics. [Downloadable!]
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- Marco Battaglini & Stephen Coate, 2007. "A Dynamic Theory of Public Spending, Taxation and Debt," Discussion Papers 1441, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
- Marco Battaglini & Steve Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," Levine's Bibliography 122247000000001094, UCLA Department of Economics. [Downloadable!]
- Marco Battaglini & Stephen Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," NBER Working Papers 12100, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Marco Battaglini & Stephen Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," NajEcon Working Paper Reviews 321307000000000026, www.najecon.org. [Downloadable!]
- Marco Battaglini & Stephen Coate, 2008. "A Dynamic Theory of Public Spending, Taxation, and Debt," American Economic Review, American Economic Association, vol. 98(1), pages 201-36, March. [Downloadable!]
Nouriel Roubini & Paul Wachtel, 1998. "Current Account Sustainability in Transition Economies," NBER Working Papers 6468, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Nouriel Roubini & Paul Wachtel, 1997. "Current Account Sustainability in Transition Economies," Working Papers 97-03, New York University, Leonard N. Stern School of Business, Department of Economics.
Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper tigers? A model of the Asian crisis," Research Paper 9822, Federal Reserve Bank of New York. [Downloadable!]
Other versions:
- Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June. [Downloadable!] (restricted)
Milesi-Ferretti, Gian Maria, 2001. "Good, Bad or Ugly? On the Effects of Fiscal Rules with Creative Accounting," CEPR Discussion Papers 2663, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Gian Maria Milesi-Ferretti, 2000. "Good, Bad or Ugly? On The Effects of Fiscal Rules with Creative Accounting," IMF Working Papers 00/172, International Monetary Fund.
- Milesi-Ferretti, Gian Maria, 2004. "Good, bad or ugly? On the effects of fiscal rules with creative accounting," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 377-394, January. [Downloadable!] (restricted)
Robert A.J. Dur & Ben D. Peletier & Otto H. Swank, 1997. "The Effect of Fiscal Rules on Public Investment if Budget Deficits are Politically Motivated," Tinbergen Institute Discussion Papers 97-125/1, Tinbergen Institute. [Downloadable!]
Other versions:
- Robert A.J. Dur & Ben D. Peletier & Otto H. Swank, 1998. "The Effect of Fiscal Rules on Public Investment if Budget Deficits Are Politically Motivated," Public Economics 9801003, EconWPA, revised 25 Feb 1999. [Downloadable!]
Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate," NBER Working Papers 6834, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)

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