Fiscal rules and discretion under persistent shocks

This paper studies the optimal level of discretion in policymaking. We consider a fiscal policy model where the government has time-inconsistent preferences with a present-bias towards public spending. The government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending. We analyze the optimal fiscal rule when the shocks are persistent. Unlike under i.i.d: shocks, we show that the ex-ante optimal rule is not sequentially optimal, as it provides dynamic incentives. The ex-ante optimal rule exhibits history dependence, with high shocks leading to an erosion of future fiscal discipline compared to low shocks, which lead to the reinstatement of discipline. The implied policy distortions oscillate over time given a sequence of high shocks, and can force the government to accumulate maximal debt and become immiserated in the long run

Banking Crises and the Rules of the Game

This paper is aimed to address when and why do banking crises occur, and whether financial reforms in reaction to crises are generally beneficial. It is argued that banking crises properly defined consist either of panics or of waves of costly bank failures, and they do not necessarily coincide. Risk-inviting microeconomic rules of the banking game that are established by government are viewed as the key necessary condition to producing a propensity for banking distress, whether in the form of a high propensity for banking panics or a high propensity for waves of bank failures.Banking, banking crises, financial reforms, microeconomic rules.

Essays on fiscal rules

This dissertation discusses the design of optimal _scal rules in a dynamic setting in which national governments with quasi-hyperbolic preferences are subject to privately observed idiosyncratic shocks. In this context, fiscal rules aim at striking a balance between exibility to react to shocks, and commitment to avoid excessive government spending. Chapter 1 derives and compares optimal rules in two di_erent environments: one in which a supranational authority is allowed to transfer resources across countries (i.e., a fiscal union) and one in which transfers are forbidden. I find that optimal fiscal rules can be implemented as de_cit limits and are complemented with a combination of grants and loans in a fiscal union. All instruments are debt-contingent: higher public debt contemporaneously tightens de_cit limits and reduces the entity of both transfers and credits. The chapter includes a calibration of the model using EU data. In Chapter 2, which is joint work with Facundo Piguillem, we study the effect of stochastic government turnover on fiscal rules' design. The model decomposes governments' present-bias in di_erent components: the fundamental political friction - captured by hyperbolic discounting; the overall uncertainty in the economy; and the relative relevance of political turnover versus business cycle uctuations. Fiscal rules, both in a national and in a supranational setting, are found to be stricter when insurance needs are low, the present bias is high and government turnover is frequent. Chapter 3, which is joint work with Facundo Piguillem and Liyan Shi, analyzes the role of sovereign default in the design of fiscal rules. We build a continuous-time model and derive the optimal fiscal rules, which tun out to be debt-dependent only when default is possible. Depending on the severity of the spending bias and the cost of default, optimal fiscal rules range from strict debt limits - complemented by strong de_cit limits - to the absence of all rules. In intermediate cases, debtdependent de_cit limits must be complemented with default rules, with some areas where default is prohibited and others where default is mandatory

In the Interests of clients or commerce? Legal aid, supply, demand, and 'ethical indeterminacy' in criminal defence work

As a professional, a lawyer's first duty is to serve the client's best interests, before simple monetary gain. In criminal defence work, this duty has been questioned in the debate about the causes of growth in legal aid spending: is it driven by lawyers (suppliers) inducing unnecessary demand for their services or are they merely responding to increased demand? Research reported here found clear evidence of a change in the handling of cases in response to new payment structures, though in ways unexpected by the policy's proponents. The paper develops the concept of 'ethical indeterminacy' as a way of understanding how defence lawyers seek to reconcile the interests of commerce and clients. Ethical indeterminacy suggests that where different courses of action could each be said to benefit the client, the lawyer will tend to advise the client to decide in the lawyer's own interests. Ethical indeterminacy is mediated by a range of competing conceptions of 'quality' and 'need'. The paper goes on to question the very distinction between 'supply' and 'demand' in the provision of legal services

Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective

While the participation decision is discrete in a static context, i.e. to work or not to work, such is not the case in a life-cycle context where workers choose the fraction of their lifetime that they spend working. In this paper, I therefore characterize the optimal redistribution policy in a life-cycle framework with both an intensive and an extensive margin of labor supply. The government should optimally design a history-dependent social security system which induces higher productivity individuals to retire later. Some redistribution therefore needs to be done through the pension system; a standard non-linear income tax is not enough.Extensive margin, Optimal redistribution, Retirement age, Social security

Measuring time preferences

We review research that measures time preferences—i.e., preferences over intertemporal tradeoffs. We distinguish between studies using financial flows, which we call “money earlier or later” (MEL) decisions and studies that use time-dated consumption/effort. Under different structural models, we show how to translate what MEL experiments directly measure (required rates of return for financial flows) into a discount function over utils. We summarize empirical regularities found in MEL studies and the predictive power of those studies. We explain why MEL choices are driven in part by some factors that are distinct from underlying time preferences.National Institutes of Health (NIA R01AG021650 and P01AG005842) and the Pershing Square Fund for Research in the Foundations of Human Behavior

Preference Heterogeneity and Optimal Capital Income Taxation

We analytically and quantitatively examine a prominent justi.cation for capital income taxation: goods preferred by those with high ability ought to be taxed. We study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and .nd that, when ability is positively related to a preference for a good, optimal marginal commodity taxes on this good may be regressive: i.e., declining with income. We derive an analytical expression for optimal commodity taxation, allowing us to study the forces for and against regressivity. We then parameterize the model to evidence on the relationship between skills and preferences and examine the quantitative case for taxes on future consumption (saving). The relationship between skill and time preference delivers quantitatively small, generally regressive capital income taxes and would justify only a fraction of the prevailing level of capital income taxation.JCKNMLNHOGJE

Preference Heterogeneity and Optimal Capital Taxation

We analytically and quantitatively examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. We study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and find that, when ability is positively related to a preference for a good, optimal marginal commodity taxes on this good may be regressive: i.e., declining with income. We derive an analytical expression for optimal commodity taxation, allowing us to study the forces for and against regressivity. We then parameterize the model to evidence on the relationship between skills and preferences and examine the quantitative case for taxes on future consumption (saving). The relationship between skill and time preference delivers quantitatively small, generally regressive capital income taxes and would justify only a fraction of the prevailing level of capital income taxation.

Climate change: Sustainable growth, markets, and institutions

human development, climate change