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Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies

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  • Giancarlo Corsetti
  • Nouriel Roubini

Abstract

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 respond 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 capital markets at the same terms as the government. Copyright 1997 Blackwell Publishers Ltd..

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  • Giancarlo Corsetti & Nouriel Roubini, 1997. "Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies," Economics and Politics, Wiley Blackwell, vol. 9(1), pages 27-54, March.
  • Handle: RePEc:bla:ecopol:v:9:y:1997:i:1:p:27-54
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    Cited by:

    1. Marco Battaglini & Stephen Coate, 2008. "A Dynamic Theory of Public Spending, Taxation, and Debt," American Economic Review, American Economic Association, vol. 98(1), pages 201-236, March.
    2. Thomas D. Willett, "undated". "A Political Economy Analysis of the Maastricht and Stability Pact Fiscal Criteria," Claremont Colleges Working Papers 1999-33, Claremont Colleges.
    3. Nouriel Roubini & Paul Wachtel, 1997. "Current Account Sustainability in Transition Economies," Working Papers 97-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. Maxwell Opoku-Afari, "undated". "Capital Flows and Current Account Sustainability: The Ghanaian Experience," Discussion Papers 07/07, University of Nottingham, CREDIT.
    5. Kapitsinis, Nikolaos & Metaxas, Theodore, 2011. "Economic crisis and the role of state policies in current globalized economy. The case of Greece," MPRA Paper 43650, University Library of Munich, Germany.
    6. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
    7. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
    8. Milesi-Ferretti, Gian Maria, 2004. "Good, bad or ugly? On the effects of fiscal rules with creative accounting," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 377-394, January.
    9. Robert A.J. Dur & Ben D. Peletier & Otto H. Swank, 1997. "The Effect of Fiscal Rules on Public Investment if Budget Deficits are Politically Motivated," Tinbergen Institute Discussion Papers 97-125/1, Tinbergen Institute.
    10. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate," NBER Working Papers 6834, National Bureau of Economic Research, Inc.

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