Fiscal Pacts

Fiscal pacts have recently played important roles in stabilization policies, particularly in Latin America. The ability of pacts to achieve austerity is examined in a game of competition among pressure groups for fiscal influence. Coalitions can freely communicate about what strategies to play and make contingent threats to the strategies of others. The credibility of fiscal pacts (strong, coalition-proof and far-sighted strong equilibria) is shown to depend critically on how acquiescence to private sector pressure enters the government's payoff function. We interpret these results in the context of austerity successes and failures in Mexico, Brazil, and Argentina.