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ID: 162220

Cabinet durability and fiscal discipline / Fortunato, David

FORTUNATO, DAVID	Journal Article
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Summary/Abstract

We argue that short government durations in parliamentary democracies increase public spending by driving a political budget cycle. We present a revision of the standard political budget cycle model that relaxes the common (often implicit) assumption that election timing is fixed and known in advance. Instead, we allow cabinets to form expectations about their durability and use these expectations to inform their spending choices. The model predicts that (1) cabinets should spend more as their expected term in office draws to a close and (2) cabinets that outlive their expected duration should run higher deficits. Using data from 15 European democracies over several decades, we show that governments increase spending as their expected duration withers and run higher deficits as they surpass their forecasted life expectancy.

Key Words

Fiscal Discipline ; Cabinet Durability

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ID: 133026

Law, focal points, and fiscal discipline in the United States a / Kelemen, R. Daniel; Teo, Terence K

Kelemen, R. Daniel	Journal Article
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2014.

Summary/Abstract

Many studies suggest that strict balanced budget rules can restrain sovereign debt and lower sovereign borrowing costs, even if those rules are never enforced in court. Why might public officials adhere to a rule that is practically never enforced in court? Existing literature points to a legal deterrence logic in which the threat of judicial enforcement deters sovereigns from violating the rules in the first place. By contrast, we argue that balanced budget rules work by coordinating decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the strength of its judicial enforcement mechanisms, determines its effectiveness. We develop a formal model that captures the logic of our argument, and we assess this model using data on U.S. states. We then consider implications of our argument for the impact of the balanced budget rules recently imposed on eurozone states in the Fiscal Compact Treaty.

Key Words

Financial Policy ; European Union - EU ; United States - US ; Focal Points ; Fiscal Discipline ; Compact Treaty ;
Budgetary Rule ; Sovereign Borrowing Costs - SBC ; Credible Threat ; Judicial Enforcement ; International Law ; Economic Policy

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