Consistent Flexibility: Enforcement of Fiscal Rules through Political Incentives
CESifo, Munich, 2020
CESifo Working Paper No. 8440
![](https://cesifo.org/DocImg/cesifo1_wp8440.jpg?c=1689236982)
We study the optimal design of a fiscal rule in a model in which the government is present-biased, shocks to tax revenues make rule compliance stochastic, and a rule violation reduces the payoff from holding office. We show that: i) the benchmark policy of the social planner can be always implemented via an optimal nonlinear fiscal rule and under certain conditions even under a linear rule; ii) the optimal rule prescribes a zero structural deficit but only partially accounts for shocks; and iii) a government with a stronger ex-ante deficit bias should be granted a higher degree of flexibility.
Public Finance
Fiscal Policy, Macroeconomics and Growth