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The Discipline-Enhancing Role of Fiscal Institutions

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  • Xavier Debrun
  • Manmohan S. Kumar

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/171.

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Length: 45
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/171

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Related research

Keywords: Fiscal transparency; Budget deficits; Budgetary policy; voters; fiscal rules; fiscal institutions; fiscal policy; fiscal rule; public debt; election; fiscal behavior; fiscal council; fiscal performance; fiscal outcomes; excessive deficits; fiscal framework; fiscal reaction functions; fiscal reaction; elections; voting; fiscal governance; fiscal discipline; fiscal illusion; fiscal agencies; political parties; fiscal arrangements; fiscal affairs department; budget constraint; fiscal affairs; fiscal arrangement; budget deficit; fiscal constitution; national fiscal rules; budget constraints; fiscal frameworks; tax revenues; fiscal prudence; public finances; fiscal variables; fiscal authorities; fiscal adjustment process; fiscal balance; fiscal adjustment; fiscal issues; fiscal restraints; budget process; fiscal outturns; fiscal coverage; fiscally conservative; fiscal decisions; fiscal problems; fiscal policy decisions; fiscal deficits; fiscal conservatism; fiscal policies;

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References

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  13. Robert A. J. Dur & Ben D. Peletier & Otto H. Swank, 1999. "Voting on the Budget Deficit: Comment," American Economic Review, American Economic Association, vol. 89(5), pages 1377-1381, December.
  14. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
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  16. Beetsma, Roel M.W.J. & Debrun, Xavier, 2007. "The new stability and growth pact: A first assessment," European Economic Review, Elsevier, vol. 51(2), pages 453-477, February.
  17. Oya Celasun & Joong Shik Kang, 2006. "On the Properties of Various Estimators for Fiscal Reaction Functions," IMF Working Papers 06/182, International Monetary Fund.
  18. francesca castellani, 2002. "A Model of Central Bank's Accountability," IHEID Working Papers 04-2002, Economics Section, The Graduate Institute of International Studies.
  19. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States," CEPR Discussion Papers 1088, C.E.P.R. Discussion Papers.
  20. Krogstrup, Signe & Wyplosz, Charles, 2006. "A Common Pool Theory of Deficit Bias Correction," CEPR Discussion Papers 5866, C.E.P.R. Discussion Papers.
  21. Xavier Debrun & Paul Masson & Catherine Pattillo, 2005. "Monetary union in West Africa: who might gain, who might lose, and why?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 454-481, May.
  22. Richard Morris & Hedwig Ongena & Ludger Schuknecht, 2006. "The reform and implementation of the Stability and Growth Pact," Occasional Paper Series 47, European Central Bank.
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