Fiscal Rules and Discretion in a Wo rld Economy
Abstract:
We consider a world economy in which all governme nts have time-inconsistent preferences with a present-bias toward governmen t spending. Fiscal rules are borrowing limits which trade off the desire to commit to not overspend against the desire to have flexibility to react to shocks to the value of spending. We compare fiscal rules which are decentr alized and independently chosen by each country to fiscal rules which are c entralized and chosen jointly by all countries. In contrast to decentralize d rules, centralized rules take into account that less flexibility affects all countries by reducing global interest rates. If the present bias is low , centralized rules are tighter than decentralized ones since countries cho osing rules independently do not internalize the redistributive effect of l ower interest rates. In contrast, if the present bias is high, centralized rules are slacker than decentralized ones since countries choosing rules in dependently do not internalize the disciplining effect of higher interest r ates. In this case, if a subset of countries can freely adopt tighter rules than those imposed centrally, then interest rates decline, which worsens f iscal discipline for the rest. Tighter fiscal policy by this subset of coun tries ultimately results in tighter centralized rules and lower flexibility for everyone.
DTSTAMP:20260404T082323Z DTSTART:20150604T130000Z DTEND:20150604T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR