Back to Search
Start Over
RULES VERSUS DISCRETION IN FISCAL POLICY*
- Source :
- The Manchester School. 80:603-629
- Publication Year :
- 2011
- Publisher :
- Wiley, 2011.
-
Abstract
- This paper applies the Kydland–Prescott framework of dynamic inconsistency to fiscal policy by considering the trade-off between output and 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.
Details
- ISSN :
- 14636786
- Volume :
- 80
- Database :
- OpenAIRE
- Journal :
- The Manchester School
- Accession number :
- edsair.doi...........23ca5fd0de62e01c7d5d551fc802e4b6