Political economy of prudent budgetary policy.
The principles of tax smoothing and public debt management with stochastic shocks to future national income are extended for prudence. A prudent government deliberately underestimates future national income and the tax base, especially if the variance and persistence of shocks hitting the tax base are large and the tax rate is high. As a precaution the tax rate is thus set higher and public spending lower to build precautionary buffers. This leads to gradual reductions in debt and debt servic...Expand abstract
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