Working Paper: CEPR ID: DP5866
Authors: Signe Krogstrup; Charles Wyplosz
Abstract: The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Along with Piguvian taxes, a number of policy measures are examined and welfare-ranked: deficit ceilings, golden rules and delegation. In general, the combination of delegation and an optimally-set deficit ceiling deliver the social optimum, even if the deficit ceiling is not credible.
Keywords: common pool; deficit bias; fiscal institutions; fiscal restraints; fiscal rules; stability pact
JEL Codes: E61; E62; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic common pool problem (H41) | budget deficit bias (H62) |
| Fiscal rules (E62) | budget deficit bias (H62) |
| Delegation to finance minister (H69) | better fiscal outcomes (H68) |
| Delegation to finance minister (H69) | optimal policies (C61) |
| Interest groups selecting transfers (D72) | deficit bias (H62) |
| Credible deficit ceiling + delegation (H68) | eliminate deficit bias (H62) |
| Non-credible ceiling (E49) | desired outcomes not achieved (L21) |