Skip to content Skip to navigation
University of Warwick
  • Study
  • |
  • Research
  • |
  • Business
  • |
  • Alumni
  • |
  • News
  • |
  • About

University of Warwick
Publications service & WRAP

Highlight your research

  • WRAP
    • Home
    • Search WRAP
    • Browse by Warwick Author
    • Browse WRAP by Year
    • Browse WRAP by Subject
    • Browse WRAP by Department
    • Browse WRAP by Funder
    • Browse Theses by Department
  • Publications Service
    • Home
    • Search Publications Service
    • Browse by Warwick Author
    • Browse Publications service by Year
    • Browse Publications service by Subject
    • Browse Publications service by Department
    • Browse Publications service by Funder
  • Help & Advice
University of Warwick

The Library

  • Login
  • Admin

Fiscal rules and discretion under persistent shocks

Tools
- Tools
+ Tools

Halac, Marina and Yared, Pierre (2013) Fiscal rules and discretion under persistent shocks. Working Paper. Coventry, UK: University of Warwick, Department of Economics. Warwick economics research papers series (TWERPS), Volume 2013 (Number 1014).

[img]
Preview
Text (Working paper)
WRAP_twerp_1014_Halac.pdf

Download (780Kb) | Preview
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...

Request Changes to record.

Abstract

This paper studies the optimal level of discretion in policymaking. We consider a fiscal policy model where the government has time-inconsistent preferences with a present-bias towards public spending. The government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending. We analyze the optimal fiscal rule when the shocks are persistent. Unlike under i.i.d: shocks, we show that the ex-ante optimal rule is not sequentially optimal, as it provides dynamic incentives. The ex-ante optimal rule exhibits history dependence, with high shocks leading to an erosion of future fiscal discipline compared to low shocks, which lead to the reinstatement of discipline. The implied policy distortions oscillate over time given a sequence of high shocks, and can force the government to accumulate maximal debt and become immiserated in the long run.

Item Type: Working or Discussion Paper (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
H Social Sciences > HJ Public Finance
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Economics -- Mathematical models , Policy sciences, Macroeconomics -- Mathematical models , Economics
Series Name: Warwick economics research papers series (TWERPS)
Publisher: University of Warwick, Department of Economics
Place of Publication: Coventry, UK
Official Date: 2013
Dates:
DateEvent
2013Published
Volume: Volume 2013
Number: Number 1014
Number of Pages: 55
Institution: University of Warwick
Status: Not Peer Reviewed
Access rights to Published version: Open Access (Creative Commons)

Request changes or add full text files to a record

Repository staff actions (login required)

View Item View Item
twitter

Email us: wrap@warwick.ac.uk
Contact Details
About Us