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Fiscal Rules as Bargaining Chips

Author

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  • Facundo Piguillem

    () (Einaudi Institute for Economics and Finance (EIEF))

  • Alessandro Riboni

    () (CREST)

Abstract

Most fiscal rules can be overridden by consensus. We show that this does not make them ine ectual. Since fiscal rules determine the outside option in case of disagreement, the opposition uses them as "bargaining chips" to obtain spending concessions. This political bargain reduces the debt accumulation problem. We analyze various rules and show that when political polarization is high, a government shutdown maximizes the opposition's bargaining power and leads to a sizeable debt reduction. When polarization is low, a balanced budget is preferable. Mandatory spending eliminates debt accumulation by removing political risk. However, it generates persistent static ineffciencies.

Suggested Citation

  • Facundo Piguillem & Alessandro Riboni, 2018. "Fiscal Rules as Bargaining Chips," Working Papers 2018-02, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2018-02
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    References listed on IDEAS

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    Cited by:

    1. Hülya Eraslan & Kirill Evdokimov & Jan Zápal, 2020. "Dynamic Legislative Bargaining," ISER Discussion Paper 1090, Institute of Social and Economic Research, Osaka University.
    2. Zapal, Jan, 2020. "Simple Markovian equilibria in dynamic spatial legislative bargaining," European Journal of Political Economy, Elsevier, vol. 63(C).
    3. Marina Azzimonti & Laura Karpuska & Gabriel Mihalache, 2020. "Bargaining over Mandatory Spending and Entitlements," Department of Economics Working Papers 20-02, Stony Brook University, Department of Economics.

    More about this item

    Keywords

    fiscal rules; government debt; legislative bargaining; political polarization; government shutdown; mandatory spending;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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