Working Paper: CEPR ID: DP1936
Authors: Harry Huizinga; Søren Bo Nielsen
Abstract: National budget deficits can create externalities through their effects on international interest rates. This paper examines the scope for fiscal rules restricting government borrowing for the case where government revenues (on the margin) stem from capital income taxation. There is no need to coordinate national borrowing, if governments have access to both a saving and an investment tax instrument. In the absence of a saving tax, however, national fiscal policies affect welfare abroad through the international interest rate. A reduction in first period deficits tied to increased government spending later is always welfare improving. Reducing first period deficits without further coordination of subsequent tax and spending policies will generally not improve welfare.
Keywords: deficits; fiscal rules
JEL Codes: F36; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| national budget deficits (H68) | international interest rates (E43) |
| international interest rates (E43) | welfare abroad (I38) |
| national budget deficits (H68) | welfare abroad (I38) |
| absence of a saving tax (H26) | welfare implications through international interest rates (F30) |
| coordinated fiscal policy changes (F42) | international interest rates (E43) |
| coordinated deficit reductions (H68) | lower international interest rates (E43) |
| lower international interest rates (E43) | increased investment (E22) |
| reduction in first-period deficits tied to increased government spending later (E62) | welfare improvement (I38) |