| Publisher | International Monetary Fund | ||
|---|---|---|---|
| Format | 538.1KB PDF | Date added | 01 Jun 2005 |
| Topics | Financial Management, Performance Budgeting and Management | ||
| Downloads | 67 | ||
The paper presents a simple model for discussing the effects of deficit limits and budget rules on fiscal policy. It is found that limits on deficit-output ratios provide incentives to implement procyclical policies when the economy is in intermediate states, and countercyclical policies only in very "good" and very "bad" economic times. As a result, fiscal "reaction functions" are not monotonically related to the state of the economy. Deficit limits are found to exert discipline only provided the limit is tight and the expected sanction large, albeit at a relatively large welfare cost.
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