Paper #1793

Title:

Fiscal targeting

Authors:

Régis Barnichon and Geert Mesters

Date:

July 2021

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.

Keywords:

Fiscal rule, impulse responses, forecasting, stability and growth pact.

JEL codes:

C14, C32, E32, E52

Area of Research:

Macroeconomics and International Economics

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