Fiscal policy with limited time commitment Alex Clymo and Andrea Lanteri
By: Clymo, Alex
.
Contributor(s): Lanteri, Andrea.
Material type: 
ArticlePublisher: 2020Subject(s): POLITICA FISCAL | IMPOSICION OPTIMA | MODELOS ECONOMETRICOSOnline resources: Click here to access online
In:
The Economic Journal v. 130, n. 627, April 2020, p. 623-652Summary: We propose a theory of optimal fiscal policy with ‘Limited-Time Commitment’. In our framework, successive governments have commitment only over finite, overlapping horizons. We first show that key results in the ‘Full Commitment’ literature can often be sustained with a single period of commitment. We then solve a calibrated model in which ‘Limited-Time Commitment’ fails to implement the ‘Full Commitment’ policy, and find that one year (three years) of commitment recovers one-third (two-thirds) of the welfare losses relative to ‘No Commitment’. Finally, we investigate the trade-off between commitment and flexibility in response to shocks.
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We propose a theory of optimal fiscal policy with ‘Limited-Time Commitment’. In our framework, successive governments have commitment only over finite, overlapping horizons. We first show that key results in the ‘Full Commitment’ literature can often be sustained with a single period of commitment. We then solve a calibrated model in which ‘Limited-Time Commitment’ fails to implement the ‘Full Commitment’ policy, and find that one year (three years) of commitment recovers one-third (two-thirds) of the welfare losses relative to ‘No Commitment’. Finally, we investigate the trade-off between commitment and flexibility in response to shocks.
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