The Discipline-Enhancing Role of Fiscal Institutions: Theory and Empirical Evidence

July 1, 2007

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Format: Chicago

Xavier Debrun, and Manmohan S. Kumar The Discipline-Enhancing Role of Fiscal Institutions: Theory and Empirical Evidence, (USA: International Monetary Fund, 2007) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper discusses the role of fiscal institutions, including budget rules and non-partisan agencies, in enhancing fiscal discipline. A dynamic model of fiscal policy shows that optimal institutions lack credibility unless the costs to bypass them are sufficiently high. In our model, a combination of complete budgetary transparency and strong democratic accountability suffice to establish credibility. Under incomplete budgetary transparency, accountable governments may also use institutions as a signal of competence to increase their reelection chances, which in turn erodes the penchant for excessive deficits. In light of the theory, empirical tests of the effectiveness of institutions are undertaken. The results further emphasize that analysis should pay due attention to simultaneity bias (because disciplined governments may be more likely to adopt strict institutions). Also, interactions among different fiscal institutions, and between the latter and key features of the political system need to be explored further.

Subject: Fiscal councils, Fiscal policy, Fiscal rules, Output gap, Public debt

Keywords: Mover accent, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/171
Stock No:

WPIEA2007171
ISBN:

9781451867350
ISSN:

1018-5941

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