Fiscal rules, bailouts, and reputation in federal governments Alessandro Dovis and Rishabh Kirpalani
By: Dovis, Alessandro
.
Contributor(s): Kirpalani, Rishabh.
Material type: 
ArticlePublisher: 2020Subject(s): TRIBUTOS LOCALES | POLITICA FISCALOnline resources: Click here to access online
In:
The American Economic Review volume 110, number 3, march 2020, p. 860-888Summary: Expectations of transfers by central governments incentivize overborrowing by local governments. In this paper, we ask if fiscal rules can reduce overborrowing if central governments cannot commit. We study a model in which the central government’s type is unknown and show that fiscal rules increase overborrowing if the central government’s reputation is low. In contrast, fiscal rules are effective in lowering debt if the central government’s reputation is high. Even when the central government’s reputation is low, binding fiscal rules will arise in the equilibrium of a signaling game.
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Bibliografía
Expectations of transfers by central governments incentivize overborrowing by local governments. In this paper, we ask if fiscal rules can reduce overborrowing if central governments cannot commit. We study a model in which the central government’s type is unknown and show that fiscal rules increase overborrowing if the central government’s reputation is low. In contrast, fiscal rules are effective in lowering debt if the central government’s reputation is high. Even when the central government’s reputation is low, binding fiscal rules will arise in the equilibrium of a signaling game.
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