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Fiscal Rules and Extrinsic Uncertainty

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  • Goenka, Aditya

Abstract

This paper analyzes the effect of two fiscal policy regimes on the set of equilibria. A general equilibrium model with public goods is used to re-examine Friedman's proposal for fiscal reform. The issue is whether a constraint upon fiscal policy requiring budget balance under all contingencies increases the stability of the economy. Stability is modelled in terms of neutralizing extrinsic uncertainty or sunspots. The government consists of bureaus providing public goods. The budgetary rules entail fixed shares of revenues and arrangements for budget balancing. Existence of equilibrium and properties of the equilibrium set are established. The Friedmanite rules permit extrinsic uncertainty to affect outcomes, while a policy that allows the bureaus greater discretion in the pursuit of their objectives neutralizes it.

Suggested Citation

  • Goenka, Aditya, 1994. "Fiscal Rules and Extrinsic Uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 401-416, May.
    • Handle: RePEc:spr:joecth:v:4:y:1994:i:3:p:401-16
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    Citations

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    Cited by:

    1. Goenka, Aditya & Prechac, Christophe, 2006. "Stabilizing sunspots," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 544-555, August.
    2. Hervé Crès, 1996. "Symmetric Smooth Consumption Externalities," SciencePo Working papers Main hal-03598166, HAL.
    3. Huberto M. Ennis & Todd Keister, 2001. "Optimal policy with probabilistic equilibrium selection," Working Paper 01-03, Federal Reserve Bank of Richmond.
    4. Aditya Goenka & Saqib Jafarey & William Pouliot, 2012. "Pollution, Mortality and Optimal Environmental Policy," Discussion Papers 12-05, Department of Economics, University of Birmingham.
    5. repec:hal:spmain:info:hdl:2441/10274 is not listed on IDEAS
    6. Marta Aloi & Hans Jorgen Jacobsen & Teresa Lloyd Braga, 1998. "Endogenous business cycles and stabilization policies," Economics Working Papers 476, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2000.
    7. Erkki Koskela & Mikko Puhakka, 2003. "Stabilizing Competitive Cycles with Distortionary Taxation," CESifo Working Paper Series 947, CESifo.
    8. Boschi, Melisso & Goenka, Aditya, 2012. "Relative risk aversion and the transmission of financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 85-99.
    9. Keister, Todd, 1998. "Money Taxes and Efficiency When Sunspots Matter," Journal of Economic Theory, Elsevier, vol. 83(1), pages 43-68, November.
    10. repec:spo:wpmain:info:hdl:2441/10274 is not listed on IDEAS
    11. Erkki Koskela & Mikko Puhakka, 2006. "Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(2), pages 149-167, June.
    12. Ghiglino, Christian & Shell, Karl, 2000. "The Economic Effects of Restrictions on Government Budget Deficits," Journal of Economic Theory, Elsevier, vol. 94(1), pages 106-137, September.
    13. Goenka, Aditya & Jafarey, Saqib & Pouliot, William, 2020. "Pollution, mortality and time consistent abatement taxes," Journal of Mathematical Economics, Elsevier, vol. 88(C), pages 1-15.
    14. Grüner, Hans Peter, 2017. "Mechanisms for the control of fiscal deficits," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 133-152.
    15. Hervé Crès, 1996. "Symmetric Smooth Consumption Externalities," SciencePo Working papers hal-03598166, HAL.
    16. Guo, Jang-Ting & Lansing, Kevin J., 2002. "Fiscal Policy, Increasing Returns, And Endogenous Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(5), pages 633-664, November.
    17. Chu, Angus C. & Liao, Chih-Hsing & Liu, Xiangbo & Zhang, Mengbo, 2021. "Indeterminacy in a matching model of money with productive government expenditure," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 497-516.
    18. Aditya Goenka, 2004. "Non-Fungibility and Mental Accounting: A Model of Bounded Rationality with Sunspot," Econometric Society 2004 Australasian Meetings 234, Econometric Society.
    19. Hervé Crès, 1996. "Symmetric Smooth Consumption Externalities," Post-Print hal-03598166, HAL.
    20. Aditya Goenka & Stefano Matta, 2008. "Manipulation of endowments and sunspot equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 267-282, August.

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