Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87100
Authors: 
Bianchi, Carluccio
Menegatti, Mario
Year of Publication: 
2007
Series/Report no.: 
Quaderni di Dipartimento, EPMQ, Università degli Studi di Pavia 199
Abstract: 
This paper purports to apply the Kydland-Prescott framework of dynamic inconsistency to the case of fiscal policy, by considering the trade-off between output and debt stabilization. The Government budget constraint provides the link between debt dynamics and the level of activity, influenced by fiscal policy. Contrary to what happens in the monetary policy framework, however, a commitment is not always superior to discretion, even in the absence of uncertainty, but only when the public debt-GDP ratio is sufficiently large. The introduction of uncertainty, as usual, implies a reduction in the net benefit generated by the adoption of a fixed rule.
Subjects: 
rules
discretion
time inconsistency
fiscal policy
JEL: 
E61
E62
H62
H63
H68
Document Type: 
Working Paper

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