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Fiscal Councils and Economic Volatility

Author

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  • Adam Geršl

    (Joint Vienna Institute; Czech National Bank (on leave); Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague (on leave))

  • Martina Jašová

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University)

  • Jan Zápal

    (IAE-CSIC, Campus UAB, (Bellaterra) Barcelona; CERGE-EI, Prague)

Abstract

We evaluate proposals for an independent fiscal authority put forward as a solution to excessive public spending. Our main conclusion is that shifting the responsibility to set broad measures of fiscal policy from the hands of the government to an independent fiscal council is not necessarily welfare improving. We show that the change is welfare improving if the ability of policymakers to assess the state of the economy does not change. However, if this institutional change involves a considerable decrease of capacity of the new agency to recognize economic shocks, citizens’ welfare can decrease as a result. This is especially significant in times of increased economic volatility such as during the recent global financial crisis. Faced with the ambiguous theoretical result, we try to gain deeper insight by calibrating our simple model.

Suggested Citation

  • Adam Geršl & Martina Jašová & Jan Zápal, 2014. "Fiscal Councils and Economic Volatility," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(3), pages 190-212, June.
  • Handle: RePEc:fau:fauart:v:64:y:2014:i:3:p:190-212
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    dynamic inconsistency; fiscal and monetary policy interaction; independent fiscal council;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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