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How to Starve the Beast: Fiscal Policy Rules

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  • Fernando M. Martin

Abstract

Countries have widely imposed fiscal rules designed to constrain government spending and ensure fiscal responsibility. This paper studies the effectiveness and welfare implications of expenditure, revenue, budget balance and debt rules when governments are discretionary and prone to overspending. The optimal prescription is either an expenditure ceiling or a combination of revenue and primary deficit ceilings. Most of the benefits can still be reaped with constraints looser than optimal or escape clauses during adverse times. When imposed on their own, revenue ceilings are only mildly effective, while budget and debt rules are altogether ineffective.

Suggested Citation

  • Fernando M. Martin, 2019. "How to Starve the Beast: Fiscal Policy Rules," Working Papers 2019-026, Federal Reserve Bank of St. Louis, revised 08 Aug 2023.
    • Handle: RePEc:fip:fedlwp:2019-026
    DOI: 10.20955/wp.2019.026
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    References listed on IDEAS

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    Cited by:

    1. Fernando M. Martin, 2020. "Fiscal Dominance," Working Papers 2020-040, Federal Reserve Bank of St. Louis, revised 26 Aug 2023.

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    More about this item

    Keywords

    fiscal rules; discretion; time-consistency; government debt; deficit; institutional design; political frictions; austerity; debt sustainability;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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