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Fiscal Policy: Institutions versus Rules

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  • Charles Wyplosz

    (Graduate Institute for International Studies, Geneva and CEPR)

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    Abstract

    Fiscal discipline is as much needed as monetary discipline. Many countries have attempted to counter the deficit bias by adopting fiscal rules that typically set a limit to their annual budget deficits. The record is not satisfactory; rules are either too lax or too tight and then ignored. This article suggests that the solution is to adopt the approach followed by inflation targeting central banks, with great success. Independent and accountable Fiscal Policy Committees, given the task of achieving debt targets and the authority to decide - or recommend - annual deficits, will be free from the deficit bias. This will allow them to exercise discretion in the short run while delivering debt sustainability in the long run.

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    Bibliographic Info

    Article provided by National Institute of Economic and Social Research in its journal National Institute Economic Review.

    Volume (Year): 191 (2005)
    Issue (Month): 1 (January)
    Pages: 64-78

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    Handle: RePEc:sae:niesru:v:191:y:2005:i:1:p:64-78

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    Related research

    Keywords: Fiscal policy; policy rules; public debts; policy institutions; time inconsistency;

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