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The political economy of balanced-budget rules

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Author Info
Jerome Creel () (Observatoire Français des Conjonctures Économiques)
Etienne Farvaque () (Université de Lille)

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Abstract

The paper first reviews the evolution of federal fiscal rules in the United States, showing a trend towards balanced-budget rules, not golden rules. An explanation to this trend is provided in a model that includes voter's preferences that are skewed by the history of the budget structure, and fiscal rules on the budget. Previous results in the literature are generalized, and the implications of fiscal rules for the use of debt as a strategic asset in the hands of politicians are derived. The inclusion of a golden rule of public finance is compared with that of a balanced-budget rule. Because of the presence of habits, we show that politicians are more prone to adopt balanced-budget rules than a golden rule.

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Publisher Info
Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2009-06.

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Date of creation: 2009
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Handle: RePEc:fce:doctra:0906

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Related research
Keywords: Budget deficit; debt; political economy; fiscal rules; habit effect;

Find related papers by JEL classification:
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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  3. Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," American Economic Review, American Economic Association, vol. 80(1), pages 37-49, March. [Downloadable!] (restricted)
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  4. Dharmapala, Dhammika, 2006. "The Congressional budget process, aggregate spending, and statutory budget rules," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 119-141, January. [Downloadable!] (restricted)
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  6. Luisa Lambertini, 2003. "Are Budget Deficits Used Strategically?," Boston College Working Papers in Economics 578, Boston College Department of Economics. [Downloadable!]
  7. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. מחקר - ביטוח לאומי, 1900. "קרן מנוף," Working Papers 35, National Insurance Institute of Israel. [Downloadable!]
  9. Jin, Jing & Zou, Heng-fu, 2002. "How does fiscal decentralization affect aggregate, national, and subnational government size?," Journal of Urban Economics, Elsevier, vol. 52(2), pages 270-293, September. [Downloadable!] (restricted)
  10. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is it is or is it ain't my obligation? Regional debt in a fiscal federation," Working Papers 05-07, Federal Reserve Bank of Dallas. [Downloadable!]
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