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Fiscal Policy with Limited-Time Commitment

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  • Alex Clymo
  • Andrea Lanteri

Abstract

We propose a theory of optimal fiscal policy with 'Limited-Time Commitment'. In our framework, successive governments have commitment only over finite, overlapping horizons. We first show that key results in the 'Full Commitment' literature can often be sustained with a single period of commitment. We then solve a calibrated model in which 'Limited-Time Commitment' fails to implement the 'Full Commitment' policy, and find that one year (three years) of commitment recovers one-third (two-thirds) of the welfare losses relative to 'No Commitment'. Finally, we investigate the trade-off between commitment and flexibility in response to shocks.

Suggested Citation

  • Alex Clymo & Andrea Lanteri, 2020. "Fiscal Policy with Limited-Time Commitment," The Economic Journal, Royal Economic Society, vol. 130(627), pages 623-652.
    • Handle: RePEc:oup:econjl:v:130:y:2020:i:627:p:623-652.
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    File URL: http://hdl.handle.net/10.1093/ej/uez066
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    Cited by:

    1. Hauk, Esther & Lanteri, Andrea & Marcet, Albert, 2021. "Optimal policy with general signal extraction," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 54-86.
    2. Oliver de Groot & Falk Mazelis & Roberto Motto & Annukka Ristiniemi, "undated". "A Toolkit for Computing Constrained Optimal Policy Projections (COPPs)," Working Papers 202112, University of Liverpool, Department of Economics.
    3. Alessandro Villa, 2022. "Credit Misallocation and Macro Dynamics with Oligopolistic Financial Intermediaries," Working Paper Series WP 2022-41, Federal Reserve Bank of Chicago.

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    More about this item

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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