Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability

This article presents a dynamic political-economic model of total government obligations. Its focus is on the interplay between debt and entitlements. In our model, both are tools by which temporarily powerful groups can extract resources from groups that will be powerful in the future: debt transfers resources across periods; entitlements directly target the future allocation of resources. We prove the following results. First, the presence of endogenous entitlements dampens the incentives of politically powerful groups to accumulate debt, but it leads to an increase in total government obligations. Second, fiscal rules can have perverse effects: if entitlements are unconstrained, and there are capital market frictions, debt limits lead to an increase in total government obligations and to worse outcomes for all groups. Analogous results hold for entitlement limits. Third, our model sheds some lights on the influence of capital market frictions on the incentives of governments to adopt fiscal rules, and implement entitlement programs. Finally, we identify preference polarization as a possible explanation for the joint growth of debt and entitlements.

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“…31 A similar pattern in the growth of entitlements, and thus in possible crowding out, holds across OECD countries. 32…”

Section: Entitlements Crowd Out Public Good Provisionmentioning

confidence: 99%

The Political Economy of Debt and Entitlements

Bouton

Lizzeri

Persico

2020

The Review of Economic Studies

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“…Economists and experts largely concur that the current set of rules has run its course and a new chapter needs to be written. 3 A wide range of more or less elaborate proposals has been advanced in the recent past (e.g., Bénassy-Quéré et al 2018;, Darvas et al 2018, Eyraud et al 2018, EFB 2018, Feld et al 2018, Heinemann 2018, and Kopits 2018. Despite the inevitable idiosyncrasies, there are quite a few common themes.…”

Section: Options For the Future: Pundits Converge Politicians Don'tmentioning

confidence: 99%

EU Fiscal Rules: Further Reform or Better Implementation?

Beetsma

Larch²

2019

SSRN Journal

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“…Fifth, the rules should both set a long-term objective and give clear short-term guidance. Recent work on fiscal rules (e.g., Eyraud andothers 2018 andIMF 2018) notes that fiscal rules need to be considered collectively and suggests that the best approach is to combine a long-term fiscal objective with a rule that specifies minimum progress in the short term toward that objective. The long-term objective is typically specified in terms of a fiscal stock, most often gross debt.…”

Section: How Well Supported Are the Rules By Public Financial Managemmentioning

confidence: 99%

Fiscal Rules for the Western Balkans

Kikoni¹,

Madzarevic-Sujster²,

Irwin³

et al. 2019

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability

Cited by 121 publications

References 42 publications

The Political Economy of Debt and Entitlements

The Political Economy of Debt and Entitlements

EU Fiscal Rules: Further Reform or Better Implementation?

Fiscal Rules for the Western Balkans

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