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Optimal Fiscal Spending and Deviation Rules under Political Uncertainty

Author

Listed:
  • RYO ARAWATARI

    (Faculty of Economics, Doshisha University)

  • Tetsuo Ono

    (Graduate School of Economics, Osaka University)

Abstract

This paper characterizes optimal fiscal rules within a model integrating fiscal rule deviations in a two-period political turnover framework. The incumbent party aims to secure favored spending through increased debt issuance due to potential power loss. The study introduces spending and deviation rules, requiring legislative approval for deviations from the spending rule. Analysis shows the optimal deviation rule, favoring flexible responses to stringent spending rules. Furthermore, larger initial debt balances warrant tighter spending rules, while the optimal deviation rule remains unaffected. Additionally, political conflict inf luences deviation rule permissiveness, aligning more with the incumbent party’s preferences as conflicts escalate.

Suggested Citation

  • RYO ARAWATARI & Tetsuo Ono, 2024. "Optimal Fiscal Spending and Deviation Rules under Political Uncertainty," Discussion Papers in Economics and Business 24-03, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:2403
    as

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    File URL: http://www2.econ.osaka-u.ac.jp/econ_society/dp/2403.pdf
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    References listed on IDEAS

    as
    1. Marina Halac & Pierre Yared, 2022. "Fiscal Rules and Discretion Under Limited Enforcement," Econometrica, Econometric Society, vol. 90(5), pages 2093-2127, September.
    2. Facundo Piguillem & Alessandro Riboni, 2021. "Fiscal Rules as Bargaining Chips [Growth in the Shadow of Expropriation]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2439-2478.
    3. Arawatari, Ryo & Ono, Tetsuo, 2021. "Public debt rule breaking by time-inconsistent voters," European Journal of Political Economy, Elsevier, vol. 69(C).
    4. Alberto Bisin & Alessandro Lizzeri & Leeat Yariv, 2015. "Government Policy with Time Inconsistent Voters," American Economic Review, American Economic Association, vol. 105(6), pages 1711-1737, June.
    5. Alessandro Dovis & Rishabh Kirpalani, 2020. "Fiscal Rules, Bailouts, and Reputation in Federal Governments," American Economic Review, American Economic Association, vol. 110(3), pages 860-888, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fiscal rules; Government debt; Political turnover.;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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