Welfare effects and the political support for fiscal rules

Available from: 
October 2013
Paper author(s): 
Alvaro Aguirre (Central Bank of Chile)
Macroeconomics - Economic growth - Monetary Policy
Fiscal Policy - Public and Welfare Economics

This paper pursues a welfare analysis of fiscal rules in an economy with heterogenous agents and incomplete markets. The model considers rules aiming to achieve economic stabilization and provide public insurance. These are the properties for which structural balance fiscal rules (SBFR) have received increasing attention from policymakers in the last years. The main quantitative exercise consists in measuring the gains of switching from the (procyclical) spending path of the typical developing country to the path prescribed by a SBFR. Additionally we assess the discipline effect of rules quantifying the welfare gains of deviating from the spending path their prescribe. All of these welfare gains are computed as functions of individual as well as aggregate features, including in the last case the cyclical stance of the economy and structural characteristics such as the way spending is targeted to different agents and the existence of public revenues that are exogenous to the economic cycle (e.g. commodity revenues). Among other results we find that poor agents benefit the most from SBFR, that the political support for implementing them is larger during booms, and that the discipline effect of SBFR is significant mostly for poor and unemployed agents.


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Research section: 
Lacea 2013 annual meeting
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