Catenarian fiscal discipline
Hans Gersbach 04 January 2014
Democratic governments tend to accumulate excessive debt. This column proposes a new rule – the ‘Catenarian Fiscal Discipline’ – which allows a fiscally disciplined incumbent to limit the debt-making of the next officeholder. This way, fiscal discipline today can lead to fiscal discipline in the future. Such a rule would require that we broaden our notion of representative democracy by recognising the fact that a current government already has various implicit ways of limiting what its elected successors can do.
Limiting the accumulation of public debt in democracies has always been a problem, but it has become a particularly pressing one in the last few decades. While there are normative justifications for public debt-making – such as letting automatic stabilisers and tax-smoothing measures operate (Barro 1979) – political processes tend to push public debt to levels that are likely to be socially undesirable.
democracy, fiscal policy, debt, time inconsistency, fiscal discipline
Dumping Russia in 1998 and Lehman ten years later: Triple time-inconsistency episodes
Guillermo Calvo 31 August 2009
This column introduces "triple time-inconsistent" episodes. First, a public institution is expected to cave in and offer a bailout to prevent a crisis. Then, in an attempt to regain credibility, it pulls back. Finally, it resumes bailing out the survivors of the wreckage caused by the policy surprise. This column characterises the 1998 Russian crisis and the current crisis as triple time-inconsistency episodes and says that a financial crisis may simply be a bad time to try to build credibility.
In the last decade we have witnessed two major systemic financial crises, namely, the 1998 Russian crisis and the current crisis, the latter initially associated with the subprime mortgage market (henceforth, subprime crisis). A critical event in the subprime crisis was the Lehman Brothers’ episode in September 2008. Lehman’s collapse, coming on the heels of the sell-off of Bear Stearns, took the market by surprise. The ensuing about-face regarding AIG was perhaps less surprising but still added a heavy dose of policy uncertainty.
crisis, time inconsistency, time-inconsistent plans