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The political economy of balanced-budget rules

The paper first reviews the evolution of federal fiscal rules in the United States, showing a trend towards balanced-budget rules, not golden rules. An explanation to this trend is provided in a model that includes voter's preferences that are skewed by the history of the budget structure, and fiscal rules on the budget. Previous results in the literature are generalized, and the implications of fiscal rules for the use of debt as a strategic asset in the hands of politicians are derived. The inclusion of a golden rule of public finance is compared with that of a balanced-budget rule. Because of the presence of habits, we show that politicians are more prone to adopt balanced-budget rules than a golden rule.

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File URL: http://www.ofce.sciences-po.fr/pdf/dtravail/WP2009-06.pdf
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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2009-06.

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Date of creation: 2009
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Handle: RePEc:fce:doctra:0906
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  1. Jing Jin & Heng-fu Zou, 2000. "How does fiscal decentralization affect aggregate, national, and subnational government size?," CEMA Working Papers 72, China Economics and Management Academy, Central University of Finance and Economics.
  2. Janos Kornai & Eric Maskin & Gerard Roland, 2002. "Understanding the Soft Budget Constraint," Economics Working Papers 0019, Institute for Advanced Study, School of Social Science.
  3. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is It Is Or Is It Ain'T My Obligation? Regional Debt In A Fiscal Federation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1469-1504, November.
  4. Heijdra, Ben J. & Meijdam, Lex, 2002. "Public investment and intergenerational distribution," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 707-735, May.
  5. Jér�me Creel & Paola Monperrus-Veroni & Francesco Saraceno, 2009. "On The Long-Term Effects Of Fiscal Policy In The United Kingdom: The Case For A Golden Rule," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(5), pages 580-607, November.
  6. Buiter, Willem H., 1998. "Notes on 'A Code for Fiscal Stability'," CEPR Discussion Papers 1831, C.E.P.R. Discussion Papers.
  7. Francisco José Veiga & Linda Gonçalves Veiga, 2004. "Political Business Cycles at the Municipal Level," NIPE Working Papers 4/2004, NIPE - Universidade do Minho.
  8. Dharmapala, Dhammika, 2006. "The Congressional budget process, aggregate spending, and statutory budget rules," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 119-141, January.
  9. Luisa Lambertini, 2003. "Are Budget Deficits Used Strategically?," Boston College Working Papers in Economics 578, Boston College Department of Economics.
  10. Linda Gonçalves Veiga & Francisco José Veiga, 2006. "Does Opportunism Pay Off?," NIPE Working Papers 5/2006, NIPE - Universidade do Minho.
  11. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
  12. Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," Scholarly Articles 4553030, Harvard University Department of Economics.
  13. Zvi Hercowitz & Michel Strawczynski, 2004. "Cyclical Ratcheting in Government Spending: Evidence from the OECD," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 353-361, February.
  14. Krogstrup, Signe & Wyplosz, Charles, 2006. "A Common Pool Theory of Deficit Bias Correction," CEPR Discussion Papers 5866, C.E.P.R. Discussion Papers.
  15. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
  16. Corsetti, Giancarlo & Roubini, Nouriel, 1996. "European versus American Perspectives on Balanced-Budget Rules," American Economic Review, American Economic Association, vol. 86(2), pages 408-13, May.
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