THE FALLACY OF FISCAL DISCIPLINE

Monetary Policy Implications of Greater Fiscal Discipline

After nearly a quarter century of large budget deficits—causing the public debt to double from 20 percent to 42 percent as a share of GDP in the industrialized countries—the need for greater fiscal discipline appears to be reaching a consensus. Last spring a balanced budget amendment to the U.S. Constitution passed in the House of Representatives and came close to passing in the Senate—a swing ...

Commentary: Monetary Policy Implications of Greater Fiscal Discipline

Discussions of fiscal policy often originate with central banks. This conference is organized by one; the Bank of England was created to help the British government finance its deficit; and it was in the Federal Reserve Bank of Minneapolis’ Quarterly Review that in 1981, Tom Sargent and Neil Wallace published their well-known article “Some Unpleasant Monetarist Arithmetic.” Their basic proposit...

Commentary: Monetary Policy Implications of Greater Fiscal Discipline

The risks generally associated with public indebtedness were already clearly identified by Adam Smith. In his principal work, The Wealth of Nations, he wrote: “The practice of funding has gradually enfeebled every state which has adopted it.” To me this does not mean that all public debt has to be called into question, even if influential politicians here in the United States are once again dem...

The “banzhaf Fallacy” Fallacy

Does Competition for Capital Discipline Governments? The Role of Fiscal Equalization

This paper examines how a fiscal equalization system affects the disciplining effect of competition for capital among heterogeneous regions in a decentralized economy. I build a model in which regions that are heterogeneous in initial endowments try to attract capital by competing public input that enhances the productivity of capital; meanwhile, a fiscal equalization system is imposed by the c...