Grave Devlin, Thomas Goujat, Eleanor McEnaney, Ryan Werffeli and
budgets (the ordinary budget and the investment budget), and the lack of reporting from other ... economy by ensuring fundamentals are stable. â However, not ...
No Fiscal Rules Grave Devlin, Thomas Goujat, Eleanor McEnaney, Ryan Werffeli and Lori Janjigian
Fiscal Rules? ● Fiscal rules impose, “a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates.” (IMF) ● Some fiscal rules: budget balance rules, debt rules, expenditure rules and revenue rules.
Why NO fiscal policy rules? ● Flexibility ● Transparency ● Credibility and trust
Problems with Fixed Rules ● Too rigid o Need flexibility to be able to adapt to current economic situation o ex: Europe’s lag in recovery time from recent recession
Problems with Fixed Rules ● Recency Bias o o
lawmakers allow recent events to have too much influence on predicted behavior of markets. Fail to account for long term risk.
● Golden Rule Paradigm o
Even rules that allow for exceptions create the mindset that we must always come close to balancing the budget even when stimulus is needed.
Short Term View
Long Term View
Lack of Transparency ● Lack of transparency resulting from fiscal policy rules is mainly driven by the existence of off-budget operations, the drafting of two separate budgets (the ordinary budget and the investment budget), and the lack of reporting from other government parties that are not included in the central government ● Guidelines on and implementation of fiscal policy rules vary by country, which incentivizes interpretation to circumvent the rules ● In the face of fiscal policy rules, the pressure to comply results in creative accounting and unlawful operating procedures that have further depressed economic situations ● The Greek Sovereign Debt Crisis
Another way to credibility and trust ● One of the main goals of fiscal rules is to ensure trust in the economy by ensuring fundamentals are stable. ● However, not all countries need fiscal rules to achieve credibility and trust. A proven record of good macroeconomic management is key. ● USA, mid 90s-today: high growth, low inflation, budget surpluses without such rules > prudent, credible discretionary economic policy ● Germany, 70s-today: has never managed to respect the golden rule or the M3 target, high credibility ● Japan, 1975: suspension of the golden rule, no change in credibility
Historically, deviations from the golden rule and even deficit targets have been successful ... FDR's New Deal has been attributed to preventing a total collapse ...
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