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Credibility and Bias: The Case for Implementing Both a Debt Anchor and a Balanced Budget Rule

Author

Listed:
  • Marcela De Castro-Valderrama

    (Banco de la Republica, Colombia)

  • Nicolas Moreno-Arias

    (Banco de la Republica, Colombia)

  • Juan Jose Ospina-Tejeiro

    (Banco de la Republica, Colombia)

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.

Suggested Citation

  • Marcela De Castro-Valderrama & Nicolas Moreno-Arias & Juan Jose Ospina-Tejeiro, 2023. "Credibility and Bias: The Case for Implementing Both a Debt Anchor and a Balanced Budget Rule," IHEID Working Papers 09-2023, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp09-2023
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal Rules; Credibility; Deficit Bias; Balanced Budget Rule; Debt Anchor Rule; Fiscal Policy; Welfare;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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