Fiscal targeting

Barnichon, Régis; Mesters, Geert

Fiscal targeting

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Citation

Barnichon, R, Mesters, G. Fiscal targeting. 2021. handle: http://hdl.handle.net/10230/68545

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Abstract

Fiscal rules are widely used to constrain policy decisions and promote fiscal discipline, but the design of flexible yet effective rules has proved a formidable task. In this paper, we propose to implement fiscal constraints through a fiscal targeting framework, paralleling central banks' move from monetary rules to inflation targeting. Under fiscal targeting, fiscal policy makers must optimally balance some fiscal objectives (e.g., keeping the deficit below 3%) with their own policy objectives (e.g., stabilizing output at potential). Fiscal targeting can be implemented with minimal assumption on the underlying economic model, and it promises a number of benefits over commonly used fiscal rules: (i) stronger buy-in from policy makers, (ii) higher fiscal discipline, (iii) transparency and ease of monitoring.