Abstract

The paper provides an explanation to the adoption of balanced-budget rules by politicians, instead of golden rules. In a model that includes voters' preferences that are skewed by the history of the budget structure, and fiscal rules on the budget, we show that incumbents favor a distorted budget allocation, and use debt strategically. The inclusion of a golden rule of public finance is compared with that of a balanced-budget rule. Due to the presence of habits, we show that the conditions for the prevalence of a balanced-budget rule are easier to fulfil than those pertaining to a golden rule.

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