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 resopnd 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 captial markets at the same terms as the government.
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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number
95-21.
Length: Date of creation: Nov 1995 Date of revision: Handle: RePEc:ste:nystbu:95-21
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