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Political Economy of Public Deficit: Perspectives for Constitutional Reform

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Abstract

The paper uses a dynamic inconsistency model known from monetary policy to assess three alternative proposals how to reform fiscal constitution in order to limit government’s incentive to use fiscal policy for maximizing political support. The return to ever-balanced-budget rule, state-contingent rules, and the establishment of an independent Fiscal Policy Committee with power to set public deficit with the aim of stabilizing the economy are discussed from the constitutional perspective, analyzing different incentives that these proposals create for government and alternative means to enhance credibility of the arrangement.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its journal AUCO Czech Economic Review.

Volume (Year): 1 (2007)
Issue (Month): 1 (March)
Pages: 67-86

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Handle: RePEc:fau:aucocz:au2007_067

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Keywords: fiscal policy; dynamic inconsistency; political economy; public deficit;

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  1. William A. Niskanen, 1992. "The Case for a New Fiscal Constitution," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 13-24, Spring.
  2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
  3. Alexis Derviz, 2007. "Cross-Border Risk Transmission by a Multinational Bank," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(1), pages 87-111, March.
  4. Matthew B. Canzoneri, 1983. "Monetary policy games and the role of private information," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 249, Board of Governors of the Federal Reserve System (U.S.).
  5. Peter Tuchyòa & Martin Gregor, 2005. "Centralization Trade-off with Non-Uniform Taxes," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 81, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  6. Karel Janda, 2003. "Credit guarantees in a credit market with adverse selection," Prague Economic Papers, University of Economics, Prague, vol. 2003(4).
  7. František Turnovec & Jacek W. Mercik & Mariusz Mazurkiewicz, 2004. "Power Indices: Shapley-Shubik OR Penrose-Banzhaf?," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 48, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.
  8. Karel Janda, 2004. "Bankruptcy Procedures with Ex Post Moral Hazard," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 61, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.
  9. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, 9.
  10. Petr Hedbávný & Ondøej Schneider, 2003. "Fiscal Policy: Too Political?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 53(11-12), pages 462-476, December.
  11. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Research Discussion Papers 6/2001, Bank of Finland.
  12. Karel Janda, 2005. "The Quantitative and Qualitative Analysis of the Budget Cost of the Czech Supporting and Guarantee Agricultural and Forestry Fund," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 86, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  13. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  14. Michal Bauer, 2005. "Theory of the Firm under Uncertainty: Financing, Attitude to Risk and Output Behavior," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 71, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  15. Marco BUTI & Werner ROEGER & Jan IN'T VELD, 2001. "Monetary and Fiscal Policy Interactions under a Stability Pact," Economics Working Papers ECO2001/08, European University Institute.
  16. repec:fth:bfdipa:6/2001 is not listed on IDEAS
  17. Wadim Strielkowski & Cathal O'Donoghue, 2005. "Ready to Go? EU Enlargement and Migration Potential: Lessons from the Czech Republic in the Context of the Irish Migration Experience," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 74, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  18. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  19. Karel Janda, 2005. "The Comparative Statics of the Effects of Credit Guarantees and Subsidies in the Competitive Lending Market," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 82, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
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