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Fiscal targeting

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Abstract

Fiscal rules are widely used to constrain policy decisions and promote fiscal discipline, but the design of flexible yet effective rules has proved a formidable task. In this paper, we propose to implement fiscal constraints through a fiscal targeting framework, paralleling central banks' move from monetary rules to inflation targeting. Under fiscal targeting, fiscal policy makers must optimally balance some fiscal objectives (e.g., keeping the deficit below 3%) with their own policy objectives (e.g., stabilizing output at potential). Fiscal targeting can be implemented with minimal assumption on the underlying economic model, and it promises a number of benefits over commonly used fiscal rules: (i) stronger buy-in from policy makers, (ii) higher fiscal discipline, (iii) transparency and ease of monitoring.

Suggested Citation

  • Régis Barnichon & Geert Mesters, 2021. "Fiscal targeting," Economics Working Papers 1793, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1793
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    More about this item

    Keywords

    Fiscal rule; impulse responses; forecasting; stability and growth pact.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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