Andrew Berryhill: A Political Economy Analysis of National Fiscal Rule Design

02/15/2023
Research Series Speaker Andrew Berryhill

A Political Economy Analysis of National Fiscal Rule Design

Fiscal rules have become a popular tool to discourage fiscal profligacy on the national level – indeed, over a hundred countries have implemented at least one. However, these rules have not been as effective as many had hoped. By the IMF’s criteria, a significant majority of rules are weakly designed and easily circumvented. This paper fills a gap in the literature by proposing a choice theory for fiscal rule design strength that explains observed patterns of rule weakness. We build a simple model of electoral competition in which politicians propose a fiscal rule as a commitment device for voters with dynamically inconsistent preferences toward the consumption of public goods. Decisions are made in an environment of asymmetric information such that politicians know the strength of rule they’re proposing but voters may not. Thus, the less ability and/or desire that voters have to ascertain the rule’s strength, the greater the incentive is for politicians to weaken rules if their motives are purely electoral in nature.