By George Kopits (eds.)
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Additional resources for Rules-Based Fiscal Policy in Emerging Markets: Background, Analysis, and Prospects
Sample text
Conclusions This chapter highlights a number of conceptual and practical issues in the political economy of fiscal rules. It is not meant as a prescription for what kind of rules are optimal (though some conclusions can nonetheless be drawn), nor as a user’s guide to fiscal rules. It is meant to help us think more clearly about some basic issues involved in the use of fiscal rules. Here we find insight into why rules often do not work: they do not address the 28 Allan Drazen cause of deficit bias, they attach no real costs to deviating from the rules, or to changing the rules.
First of all, it is impossible to specify all possible contingencies ex ante. Second, when the information is private, it is often difficult to verify whether or not the government has reneged on a state-contingent rule. The difficulty in verification suggests that to be credible, numerical fiscal policy rules must be simple, though we come back to the problems listed earlier. The requirement that compliance with a fiscal rule be easily verifiable is usually labeled transparency of fiscal rules.
To the extent that lawmakers see little cost to changing a fiscal target, it will be changed. Perhaps somewhat paradoxically, in the cases of the legislation in the United States and Israel, lawmakers apparently placed a lower cost on changing the law than on breaking it. In part, this may be because the cost of breaking the law was only the resulting negative publicity (the “negative-spotlight” effect). It may be that not meeting the target at a well-specified time would have been more damaging than changing the target as part of the budget proposal, but this is a conjecture.