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

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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;

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References

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  17. Richard Morris & Hedwig Ongena & Ludger Schuknecht, 2006. "The reform and implementation of the Stability and Growth Pact," Occasional Paper Series 47, European Central Bank.
  18. Oya Celasun & Joong Shik Kang, 2006. "On the Properties of Various Estimators for Fiscal Reaction Functions," IMF Working Papers 06/182, International Monetary Fund.
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