Working Paper: CEPR ID: DP8738
Authors: Zheng Michael Song; Kjetil Storesletten; Fabrizio Zilibotti
Abstract: This paper proposes a dynamic politico-economic theory of fiscal policy in a world comprising a set of small open economies, whose driving force is the intergenerational conflict over debt, taxes, and public goods. Subsequent generations of voters choose fiscal policy through repeated elections. The presence of young voters induces fiscal discipline, i.e., low taxes and low debt accumulation. The paper characterizes the Markov-perfect equilibrium of the voting game in each economy, as well as the stationary equilibrium debt distribution and interest rate of the world economy. The equilibrium can reproduce some salient features of fiscal policy in modern economies.
Keywords: Fiscal Discipline; Fiscal Policy; General Equilibrium; Government Debt; High Debt in Greece and Italy; Intergenerational Conflict; Markov Equilibrium; Political Economy; Public Goods; Repeated Voting
JEL Codes: D72; E62; H41; H62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| young voters (K16) | fiscal discipline (E62) |
| fiscal discipline (E62) | low taxes (H29) |
| fiscal discipline (E62) | reduced debt accumulation (H63) |
| public good preferences (H41) | fiscal discipline (E62) |
| public good preferences (H41) | lower levels of government debt (H69) |
| demographic transitions (J11) | political power of young vs old voters (D72) |
| political power of young vs old voters (D72) | fiscal discipline (E62) |
| fiscal discipline (E62) | debt levels (H63) |