Welfare Effects of Fiscal Procyclicality: Public Insurance with Heterogeneous Agents
This paper pursues a welfare analysis of fiscal rules in an economy with heterogenous agents and incomplete markets. The model considers rules aiming to achieve economic stabilization and provide public insurance. These are the properties for which structural balance fiscal rules (SBFR) have received increasing attention from policymakers in the last years. The main quantitative exercise consists in measuring the gains of switching from the (procyclical) spending path of the typical developing country to the path prescribed by a SBFR. Additionally we assess the discipline effect of rules quantifying the welfare gains of deviating from the spending path they prescribe. All of these welfare gains are computed as functions of individual as well as aggregate features, including in the last case the cyclical stance of the economy and structural characteristics such as the way spending is targeted to different agents and the existence of public revenues that are exogenous to the economic cycle (e.g.
commodity revenues).
This paper pursues a welfare analysis of fiscal rules in an economy with heterogenous agents and incomplete markets. The model considers rules aiming to achieve economic stabilization and provide public insurance. These are the properties for which structural balance fiscal rules (SBFR) have received increasing attention from policymakers in the last years. The main quantitative exercise consists in measuring the gains of switching from the (procyclical) spending path of the typical developing country to the path prescribed by a SBFR. Additionally we assess the discipline effect of rules quantifying the welfare gains of deviating from the spending path they prescribe. All of these welfare gains are computed as functions of individual as well as aggregate features, including in the last case the cyclical stance of the economy and structural characteristics such as the way spending is targeted to different agents and the existence of public revenues that are exogenous to the economic cycle (e.g.
commodity revenues).