The Political Economy of Balanced-Budget Rules

Abstract

The paper first reviews the evolution of federal fiscal rules in the United States, showing a trend towards balanced-budget rules, not golden rules. An explanation to this trend is provided in a model that includes voter's preferences that are skewed by the history of the budget structure, and fiscal rules on the budget. Previous results in the literature are generalized, and the implications of fiscal rules for the use of debt as a strategic asset in the hands of politicians are derived. The inclusion of a golden rule of public finance is compared with that of a balanced-budget rule. Because of the presence of habits, we show that politicians are more prone to adopt balanced-budget rules than a golden rule.

The Analysis of Budget Rules and Macroeconomic Implications in Several Developed Economies

“…4 These have been instituted in the USA with the purpose of restricting the borrowing power of the authorities. 6 . This system has been adopted in the early 2007.…”