codes_data_figures_tables.zip

We study optimal debt ceilings in a political-agency model with uncertainty about both policymaker
type (benevolent or selfish) and economic state (good or bad). Elections generate disciplining
and selection effects that differ across pooling, hybrid, and separating equilibria induced by different ceilings. The optimal ceiling trades off distorted intertemporal allocation under benevolent
policymakers against excessive debt under selfish ones. Increased fiscal transparency appears ineffective under constant ceilings. State-contingent ceilings do improve welfare by adapting to economic
conditions. Our results support differentiating budgetary restrictions in the reformed EU Stability and Growth Pact and underscore the role of independent fiscal institutions.