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Rousseau's social contract or Machiavelli's virtue? A measure of fiscal credibility

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Abstract

The concept of fiscal credibility is a watermark of some of the fiscal policy literature, but beyond an intuitive parallel with monetary policy, it remains not well defined, nor measured. This paper provides an explicit measure of fiscal credibility, based on the anchoring of private expectations onto official targets. I document how credibility varies among a sample of 26 European countries and evolves over 1995-2019. I find that private agents do not trust all governments uniformly. Country differences are mainly driven by past fiscal performance and institutions (fiscal rules and councils). Conversely, I find that credibility impacts sovereign financing conditions, as well as macroeconomic performance. Governments should thus strive to be (à la Rousseau) or appear (à la Machiavelli) credible.

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  • Nicolas End, 2020. "Rousseau's social contract or Machiavelli's virtue? A measure of fiscal credibility," AMSE Working Papers 2042, Aix-Marseille School of Economics, France.
    • Handle: RePEc:aim:wpaimx:2042
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    1. Nicolas End, 2021. "The Prince and Me A model of Fiscal Credibility," AMSE Working Papers 2127, Aix-Marseille School of Economics, France.

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    More about this item

    Keywords

    fiscal policy; credibility;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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