Advanced Search
MyIDEAS: Login to save this paper or follow this series

Incomplete Fiscal Rules with Imperfect Enforcement

Contents:

Author Info

Abstract

This paper analyses the effect of limits on fiscal deficits when fiscal policy outcomes depend on automatic stabilizers and when fiscal rules lack perfect credibility. The model developed, which includes interactions between monetary and fiscal policy, provides theoretical support for existing arguments that fiscal rules contracted on a structural deficit will be welfare-enhancing relative to rules written on the actual deficit. The latter rules would result in a procyclical bias in fiscal policy, as well as a contractionary bias in monetary policy. Contrary to existing arguments, the model also suggests that rules written on the structural deficit may ultimately be more credible than those written on the actual deficit. The reason for this is that rules written on the actual fiscal deficit risk running into a credibility trap; higher marginal penalties will be necessary when initial credibility of enforcement is imperfect, but announcing a higher penalty for violating a fiscal rule can actually reduce credibility if the penalty is disproportionately large relative to the violation.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nuffield.ox.ac.uk/economics/papers/2005/w12/fiscrules82.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W12.

as in new window
Length: 36 pages
Date of creation: 10 Feb 2005
Date of revision:
Handle: RePEc:nuf:econwp:0512

Contact details of provider:
Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords:

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262522608, December.
  2. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 129-147, February.
  3. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  4. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1998, C.E.P.R. Discussion Papers.
  5. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, American Economic Association, vol. 75(3), pages 530-38, June.
  6. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, Elsevier, vol. 60(2), pages 235-247, August.
  7. Cukierman, Alex & Liviatan, Nissan, 1991. "Optimal accommodation by strong policymakers under incomplete information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 99-127, February.
  8. Robert J. Barro, 1986. "Reputation in a Model of Monetary Policy with Incomplete Information," NBER Working Papers 1794, National Bureau of Economic Research, Inc.
  9. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall.
  10. Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
  11. Maskin, Eric, 2002. "On indescribable contingencies and incomplete contracts," European Economic Review, Elsevier, Elsevier, vol. 46(4-5), pages 725-733, May.
  12. Florin Ovidiu BILBIIE, 2001. "Delegation and Coordination in Fiscal-Monetary Policy Games: Implementation of the Best Feasible Equilibrium," Economics Working Papers, European University Institute ECO2001/13, European University Institute.
  13. Tabellini, Guido, 1986. "Money, debt and deficits in a dynamic game," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 10(4), pages 427-442, December.
  14. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "Should the European Central Bank and the Federal Reserve be concerned about fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 333-389.
  15. Bernard Salanié, 2005. "The Economics of Contracts: A Primer, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262195259, December.
  16. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," American Economic Review, American Economic Association, American Economic Association, vol. 93(5), pages 1522-1542, December.
  17. Beetsma, Roel & Jensen, Henrik, 2003. "Contingent deficit sanctions and moral hazard with a stability pact," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 187-208, October.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nuf:econwp:0512. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.