On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates

Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of St. Louis
Working Papers
The Value of Constraints on Discretionary Government Policy
Fernando M. Martin

This paper investigates how institutional constraints discipline the behavior of discretionary governments subject to an expenditure bias. The focus is on constraints implemented in actual economies: monetary policy targets, limits on the deficit and debt ceilings. For a variety of aggregate shocks considered, the best policy is to impose a minimum primary surplus of about half a percent of output. Most welfare gains from constraining government behavior during normal times, which to a large extent is sufficient to discipline policy in adverse times. Monetary policy targets are not generally desirable as they hinder the ability of governments to smooth distortions. Allowing for the effective use of inflation during transitions is a key component of good institutional design. Debt ceilings are benign, but always dominated by deficit constraints. More pre-commitment to government actions is ineffective in curbing inefficiently high public expenditure.

Download Full text
Download http://dx.doi.org/10.20955/wp.2016.019
Cite this item
Fernando M. Martin, The Value of Constraints on Discretionary Government Policy, Federal Reserve Bank of St. Louis, Working Papers 2016-19, 27 Feb 2016, revised 15 Feb 2017.
More from this series
JEL Classification:
Subject headings:
Keywords: time-consistency; discretion; government debt; inflation; deficit; fiscal constraints; inflation targeting; institutional design; political frictions.
DOI: 10.20955/wp.2016.019
For corrections, contact Anna Oates ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal