Research
"Costly Escape from Fiscal Rules: The Political Economy of Implementing Extraordinary Debt Repayment Clauses"
Abstract: Many countries overuse the escape clauses in their fiscal rules, resulting in higher deficits and debt. I study a mechanism in Switzerland’s fiscal rule that I call an “extraordinary debt repayment clause” (EDRC), which was created to prevent this overuse. Switzerland’s EDRC mandates that extraordinary debt incurred while the escape clause is activated must be paid back within six years. This accelerated repayment timeline creates an additional cost to activating the escape clause because it reduces the ability to smooth debt repayments over time. Given that an EDRC makes activating the escape clause more costly, when would politicians want to implement one? I build a model in which politicians respond to a negative shock to study two plausible scenarios. The first scenario is when politicians have conflicting preferences over the allocation of government funds – implementing an EDRC would deter a party with different spending priorities from activating the escape clause in the future. The second scenario is when politicians also have time-inconsistent preferences – politicians may worry that their future present-biased will be overly willing to activate the escape clause. In both scenarios, I find that an EDRC would reduce expected utility in most outcomes. While an EDRC does discourage escape clause activation, the model suggests that its costs will likely limit the extent of its adoption in other countries.
"Resolving the Puzzle of Weak Fiscal Rules: Time Inconsistency, Political Incentives, and Asymmetric Information"
(Under Review)
Abstract: Many national fiscal rules are weakly designed and susceptible to circumvention, limiting their effectiveness. However, if politicians were trying to solve their time-inconsistency problem (deficit bias), one would expect the rules to be strong. I argue that politicians may choose a rule’s design strength in response to voters’ time-inconsistency instead. I build a political agency model in which voters have time-inconsistent preferences and an incumbent politician proposes a fiscal rule to voters as a commitment device for future spending levels. The politician also chooses the strength of fiscal rule design which determines how binding it is, but voters only learn the design strength some of the time, reflecting asymmetric information. In the main equilibrium of interest, the chosen design strength largely depends on a tradeoff for the incumbent politician: a weak rule would allow him to cater to the preferences of voters in future periods, conferring political benefits. However, current voters may discover the proposed rule’s weakness and penalize the politician. The main predictions of the model are that higher (lower) degrees of both voter time-inconsistency and asymmetric information will lead to politicians proposing weak (strong) fiscal rules more often.
"Rule-Based Fiscal Governance: Challenges, Alternatives, and a Path for Reform"
(Forthcoming Book Chapter)
Abstract: This paper focuses on the main design challenges for rules, which include accounting for Knightian uncertainty, limiting political discretion, and encouraging rule continuity when compliance is politically costly. In response to these challenges, some have argued for alternative fiscal governance approaches to replace rule-based governance, one of which is “fiscal standards.” I engage with the main arguments for fiscal standards and contend that they present new governance challenges while failing to address many of the challenges of rules. I then revisit James Buchanan and Richard Wagner’s fiscal rule proposal in their book, “Democracy in Deficit,” and I identify two notable ways it differs from modern proposals. First, they de-emphasize flexibility because they believe it can compromise a fiscal rule’s status as a rule, in the sense that a rule must demand strict adherence. Second, they emphasize the need for congruence between fiscal rules and the values of citizens. I flesh out the justifications for these features and I argue that Buchanan and Wagner’s proposal contains valuable insights that could help guide reforms to strengthen current rules, as demonstrated in real-world cases such as Switzerland.