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Fiscal Rules: Theoretical Issues and Historical Experiences

In: Fiscal Policy after the Financial Crisis

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  • Charles Wyplosz

Abstract

Fiscal indiscipline is a feature of many developed countries. It is generally accepted that the source of the phenomenon lies in the common pool problem, the fact that recipients of public spending to fail to fully internalize the costs that taxpayers must assume. As a result, democratically elected governments are led to postpone tax collection, or to cut spending. Solving the fiscal discipline problem requires internalizing this externality. This calls for adequate institutions or for rules, or both. This paper reviews the various types of solutions that have been discussed in the literature and surveys a number of experiments. With the European debt crisis in mind, the paper pays particular attention to the common pool problem that emerges in federal states. The main conclusions are the following. First, rules are unlikely to exist unless they come with supporting institutions. Second, fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, but they help. Third, because institutions must bind the policymakers without violating the democratic requirement that elected officials have the power to decide on budgets, effective arrangements are those that give institutions the authority to apply legal rules or to act as official watchdogs.

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This chapter was published in:

  • Alberto Alesina & Francesco Giavazzi, 2013. "Fiscal Policy after the Financial Crisis," NBER Books, National Bureau of Economic Research, Inc, number ales11-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12656.

    Handle: RePEc:nbr:nberch:12656

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    1. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009. "Government risk premiums in the bond market: EMU and Canada," European Journal of Political Economy, Elsevier, vol. 25(3), pages 371-384, September.
    2. Lars Jonung & Martin Larch, 2006. "Improving fiscal policy in the EU: the case for independent forecasts," Economic Policy, CEPR & CES & MSH, vol. 21(47), pages 491-534, 07.
    3. James M. Poterba & Kim S. Rueben, 1997. "State Fiscal Institutions and the U.S. Municipal Bond Market," NBER Working Papers 6237, National Bureau of Economic Research, Inc.
    4. Xavier Debrun & David Hauner & Manmohan S. Kumar, 2009. "Independent Fiscal Agencies," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 44-81, 02.
    5. International Monetary Fund, 2010. "A Historical Public Debt Database," IMF Working Papers 10/245, International Monetary Fund.
    6. Stéphanie Guichard & Mike Kennedy & Eckhard Wurzel & Christophe André, 2007. "What Promotes Fiscal Consolidation: OECD Country Experiences," OECD Economics Department Working Papers 553, OECD Publishing.
    7. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2001. "Institutional Rules for Federations," NBER Working Papers 8646, National Bureau of Economic Research, Inc.
    8. Krogstrup, Signe & Wyplosz, Charles, 2010. "A common pool theory of supranational deficit ceilings," European Economic Review, Elsevier, vol. 54(2), pages 269-278, February.
    9. Martin Larch, 2010. "Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-count," European Economy - Economic Papers 414, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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    Cited by:
    1. Sterdyniak, Henri & Mathieu, Catherine, 2012. "Faut-il des règles de politiques budgétaires ?," Open Access publications from Sciences Po info:hdl:2441/eo6779thqgm, Sciences Po.
    2. Veronica Grembi & Tommaso Nannicini & Ugo Troiano, 2011. "Policy Responses to Fiscal Restraints: A Difference-in-Discontinuities Design," Working Papers 397, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.
    4. Grjebine, André, 2013. "L’Eurosystème: un mécanisme de transferts en faveur des pays déficitaires ? Le débat," Open Access publications from Sciences Po info:hdl:2441/eo6779thqgm, Sciences Po.
    5. Silvana Bartoletto & Bruno Chiarini & Elisabetta Marzano, 2012. "The Sustainability of Fiscal Policy in Italy: A Long-Term Perspective," CESifo Working Paper Series 3812, CESifo Group Munich.

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