Arbeitspapier
The Limits of Political Compromise: Debt Ceilings and Political Turnover
We study the desirability of limits on the public debt and of political turnover in an economy where incumbents have an incentive to set public expenditures above the socially optimal level due to rent-seeking motives. Parties alternate in office and cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if it expects future governments to do the same. In contrast to the received literature, we find that strict limits on government borrowing can exacerbate political economy distortions by making a political compromise unsustainable. This tends to happen when political turnover is limited. Conversely, a tight limit on the public debt fosters a compromise that yields the efficient outcome if political turnover is vigorous. Our analysis thus suggests that to sustain good economic policies, a society needs to restrict either the extent of political turnover or the ability of governments to issue debt, but not both.
- Language
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Englisch
- Bibliographic citation
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Series: CESifo Working Paper ; No. 6429
- Classification
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Wirtschaft
Policy Objectives; Policy Designs and Consistency; Policy Coordination
Fiscal Policy
Fiscal Policies and Behavior of Economic Agents: General
National Debt; Debt Management; Sovereign Debt
- Subject
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debt limits
political turnover
efficient policies
fiscal rules
- Event
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Geistige Schöpfung
- (who)
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Cunha, Alexandre B.
Ornelas, Emanuel
- Event
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Veröffentlichung
- (who)
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Center for Economic Studies and ifo Institute (CESifo)
- (where)
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Munich
- (when)
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2017
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Cunha, Alexandre B.
- Ornelas, Emanuel
- Center for Economic Studies and ifo Institute (CESifo)
Time of origin
- 2017
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Political consequences of consumer debt relief
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The dynamics of sovereign default risk and political turnover
The Political Economy of Public Debt Management. Institutional Setting and Political Influence