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Rules versus discretion in fiscal policy

Author

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  • C. Bianchi
  • M. Menegatti

Abstract

This paper purports to apply the Kydland-Prescott framework of dynamic inconsistency to the case of fiscal policy, by considering the trade-off between output and debt stabilization. The Government budget constraint provides the link between debt dynamics and the level of activity, influenced by fiscal policy. Contrary to what happens in the monetary policy framework, however, a commitment is not always superior to discretion, even in the absence of uncertainty, but only when the public debt-GDP ratio is sufficiently large. The introduction of uncertainty, as usual, implies a reduction in the net benefit generated by the adoption of a fixed rule.

Suggested Citation

  • C. Bianchi & M. Menegatti, 2007. "Rules versus discretion in fiscal policy," Economics Department Working Papers 2007-EP05, Department of Economics, Parma University (Italy).
    • Handle: RePEc:par:dipeco:2007-ep05
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    References listed on IDEAS

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    2. Steven J. Davis & Magnus Henrekson, 2004. "Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons," NBER Working Papers 10509, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Gladys Awinpoak Abindaw Nabieu & Godfred Alufar Bokpin & Achampong Kofi Osei & Patrick Opoku Asuming, 2021. "Fiscal rules, fiscal performance and economic growth in Sub‐Saharan Africa," African Development Review, African Development Bank, vol. 33(4), pages 607-619, December.
    2. DUMITRESCU, Bogdan Andrei, 2015. "The Fiscal Framework In Romania – The Efficiency Of Fiscal Rules," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 19(3), pages 91-106.

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    More about this item

    Keywords

    rules; discretion; time inconsistency; fiscal policy;
    All these keywords.

    JEL classification:

    • 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
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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