This paper applies the Kydland–Prescott framework of dynamic inconsistency to fiscal policy by considering the trade-off between debt stabilization. In a static framework, commitment to debt stabilization is superior to discretion only when the public debt–GDP ratio is high. Discretion, though, is always inferior to an optimal fiscal rule, which however entails a positive predetermined debt growth. As usual, the introduction of uncertainty determines an additional advantage for discretion. Finally, if dynamic considerations are introduced, the optimal fiscal rule is characterized by positive debt growth in the short run and debt stabilization in the long run.

Rules versus discretion in fiscal policy / C. Bianchi; M. Menegatti. - In: MANCHESTER SCHOOL. - ISSN 1463-6786. - 80:5(2012), pp. 603-629. [10.1111/j.1467-9957.2011.02240.x]

Rules versus discretion in fiscal policy

MENEGATTI, Mario
2012

Abstract

This paper applies the Kydland–Prescott framework of dynamic inconsistency to fiscal policy by considering the trade-off between debt stabilization. In a static framework, commitment to debt stabilization is superior to discretion only when the public debt–GDP ratio is high. Discretion, though, is always inferior to an optimal fiscal rule, which however entails a positive predetermined debt growth. As usual, the introduction of uncertainty determines an additional advantage for discretion. Finally, if dynamic considerations are introduced, the optimal fiscal rule is characterized by positive debt growth in the short run and debt stabilization in the long run.
Rules versus discretion in fiscal policy / C. Bianchi; M. Menegatti. - In: MANCHESTER SCHOOL. - ISSN 1463-6786. - 80:5(2012), pp. 603-629. [10.1111/j.1467-9957.2011.02240.x]
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11381/2336568
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 4
  • ???jsp.display-item.citation.isi??? 2
social impact