Credibility and bias: the case for implementing both a debt anchor and a balanced budget rule Author
Year: 2024
Type: preprint
Abstract: Should a government have more than one fiscal rule constraining fiscal aggregates? If so, why? In this paper, we present a dynamic general equilibrium model of a small open economy featuring an incumbent government to assess how and why implementing a budget balance rule and a debt anchor rule is non-redundant and welfare-improving. Our findings suggest that the implementation of a combination of fiscal rules is optimally preferred over a single rule, as each rule has a different effect on credibility and fiscal behaviour. While the debt anchor rule prevents the propagation of the negative effects of imperfect fiscal credibility, the operational rule reduces amplification by avoiding overindebtedness and minimizing the welfare-detrimental effects arising from a deficit-biased government.
Authors: De Castro-Valderrama, Marcela, Moreno-Arias, Nicolas, Ospina-Tejeiro, Juan José
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
Funder: Georgetown University
OpenAlex ID: W6940098384
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