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The Prince and Me A model of Fiscal Credibility

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  • Nicolas End

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

Government fiscal actions influence forward-looking private agents' current and future decisions, which, in turn, impact fiscal performance. This paper highlights this expectation channel with a Barro-type endogenous growth model where an impatient government finances growth-enhancing spending through income taxes and public debt. Fiscal and macroeconomic outcomes emerge from the interplay of households and policymakers' preferences for public expenditure and private consumption. I find that the government's maximizing its own utility and facing an endogenous interest spread are sufficient ingredients to yield multiple equilibria, independently of the government's policy intentions. The economy almost always heads to the high public spending equilibrium, emphasizing the importance of fiscal institutions to tame government impatience and bolster fiscal credibility.

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  • Nicolas End, 2021. "The Prince and Me A model of Fiscal Credibility," Working Papers halshs-03222115, HAL.
    • Handle: RePEc:hal:wpaper:halshs-03222115
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03222115
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    More about this item

    Keywords

    fiscal policy; credibility; expectations;
    All these keywords.

    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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