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- Title
Fiscal rules and extrinsic uncertainty.
- Authors
Goenka, Aditya
- Abstract
This paper analyzes the effect of two fiscal policy regimes on the set of equilibria. A general equilibrium model with public goods is used to re-examine Friedman's [9] proposal for fiscal reform. The issue is whether a constraint upon fiscal policy requiring budget balance under all contingencies increases the stability of the economy. Stability is modelled in terms of neutralizing extrinsic uncertainty or sunspots. The government consists of bureaus providing public goods. The budgetary rules entail fixed shares of revenues and arrangements for budget balancing. Existence of equilibrium and properties of the equilibrium set are established. The Friedmanite rules permit extrinsic uncertainty to affect outcomes, while a policy that allows the bureaus greater discretion in the pursuit of their objectives neutralizes it.
- Subjects
FISCAL policy; ECONOMIC equilibrium; UNCERTAINTY; PUBLIC finance; PUBLIC goods; ECONOMIC policy
- Publication
Economic Theory, 1994, Vol 4, Issue 3, p401
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/BF01215379