IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v110y2020i3p860-88.html
   My bibliography  Save this article

Fiscal Rules, Bailouts, and Reputation in Federal Governments

Author

Listed:
  • Alessandro Dovis
  • Rishabh Kirpalani

Abstract

Expectations of transfers by central governments incentivize overborrowing by local governments. In this paper, we ask if fiscal rules can reduce overborrowing if central governments cannot commit to enforce penalties when rules are violated. We study a model in which the central government's type is unknown and show that fiscal rules increase overborrowing if the central government's reputation is low. In contrast, fiscal rules are effective in lowering debt if the central government's reputation is high. Even when the central government's reputation is low, binding fiscal rules will arise in the equilibrium of a signaling game.

Suggested Citation

  • Alessandro Dovis & Rishabh Kirpalani, 2020. "Fiscal Rules, Bailouts, and Reputation in Federal Governments," American Economic Review, American Economic Association, vol. 110(3), pages 860-888, March.
    • Handle: RePEc:aea:aecrev:v:110:y:2020:i:3:p:860-88
    DOI: 10.1257/aer.20181432
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/aer.20181432
    Download Restriction: no
    File URL: https://doi.org/10.3886/E111668V1
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/aer.20181432.appx
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/aer.20181432.ds
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://libkey.io/10.1257/aer.20181432?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:110:y:2020:i:3:p:860-88. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.