Working Paper: NBER ID: w21492
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: Fiscal Rules; Government Spending; Interest Rates; Coordination; Present Bias
JEL Codes: D02; D82; E61; H1; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coordinated fiscal rules (E61) | lower interest rates (E43) |
| uncoordinated fiscal rules (E61) | higher interest rates (E43) |
| present bias is large (D91) | coordinated rules may become slacker than uncoordinated rules (E61) |
| surplus limits (H62) | enhanced welfare (I38) |