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Fiscal Rules and Discretion in a World Economy

Marina Halac, Pierre Yared

NBER Working Paper No. 21492
Issued in August 2015, Revised in March 2017
NBER Program(s):The Economic Fluctuations and Growth Program, The Political Economy Program

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.

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Document Object Identifier (DOI): 10.3386/w21492

Published: Marina Halac & Pierre Yared, 2018. "Fiscal Rules and Discretion in a World Economy," American Economic Review, vol 108(8), pages 2305-2334. citation courtesy of

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