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Fiscal rules in a volatile world: A welfare-based approach

  • Garcia, Carlos J.
  • Restrepo, Jorge E.
  • Tanner, Evan

It is widely agreed that a fiscal rule should boost discipline and credibility. A rule should also reduce macroeconomic volatility and be easily understood. Toward such ends, a government may run structural surpluses. In so doing, the government accumulates a precautionary cushion of assets on behalf of agents who do not enjoy access to capital markets. As an additional criterion, that level of assets should be bounded. We provide an example of a structural surplus rule that satisfies all such criteria. In our general equilibrium simulations, we show that such a rule benefits credit-constrained consumers but may hurt others.

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Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 33 (2011)
Issue (Month): 4 (July)
Pages: 649-676

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Handle: RePEc:eee:jpolmo:v:33:y:2011:i:4:p:649-676
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