Working Paper: CEPR ID: DP12570
Authors: Marina Halac; Pierre Yared
Abstract: Governments are present-biased toward spending. Fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks. We compare coordinated rules -- chosen jointly by a group of countries -- to uncoordinated rules. If governments' present bias is small, coordinated rules are tighter than uncoordinated rules: individual countries do not internalize the redistributive effect of interest rates. However, if the bias is large, coordinated rules are slacker: countries do not internalize the disciplining effect of interest rates. Surplus limits enhance welfare, and increased savings by some countries or outside economies can hurt the rest.
Keywords: institutions; asymmetric and private information; macroeconomic policy; structure of government; political economy
JEL Codes: D02; D82; E60; H10; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coordinated fiscal rules (small present bias) (E61) | lower interest rates (E43) |
| coordinated fiscal rules (small present bias) (E61) | enhanced welfare (I38) |
| coordinated fiscal rules (large present bias) (E61) | higher interest rates (E43) |
| coordinated fiscal rules (large present bias) (E61) | slacker rules (P37) |
| increased savings by some countries (F32) | negative impact on others (D62) |