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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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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. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
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  4. 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.
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  7. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation," NBER Working Papers 11655, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. 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.
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  12. Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
  13. Buiter, Willem H., 1998. "Notes on 'A Code for Fiscal Stability'," CEPR Discussion Papers 1831, C.E.P.R. Discussion Papers.
  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. 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.
  16. 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.
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