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Credibility of Fiscal Policies and Independent Fiscal Bodies

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  • F. Naert

Abstract

In this paper we address the problem of credibility in fiscal policy. In many instances fiscal policy as conducted by governments is not perceived as credible. The targets set forward by government are often not met and usually the divergence is on the negative side. Taxes are overestimated and spending is underestimated, leading to a deficit bias and growing government debts. To enhance the credibility of fiscal policy several schemes are put forward. Most frequently used are fiscal rules that replace discretionary decision making. Fiscal rules however are difficult to sanction and although they can improve the quality of fiscal policy, they do not guarantee sound fiscal policy. Therefore it is sometimes suggested to install fiscal councils on top of the fiscal rules. Fiscal councils with tasks in forecasting and assessing fiscal policy have been and are being introduced in more and more countries. Some economists want to go further however and propose to establish fiscal councils with independent powers to conduct fiscal policy within the limits that parliament lays down. The central research themes of this paper are the questions whether and how fiscal rules and independent fiscal institutions can improve the credibility of fiscal policy. The first research question can be answered affirmatively given the experience in monetary and regulatory policy. Regarding the second research question the challenge is to disentangle the distributional from the stabilization elements in fiscal policy. If that can be done stabilization could be delegated to an independent fiscal body while distribution should remain a political prerogative.

Suggested Citation

  • F. Naert, 2011. "Credibility of Fiscal Policies and Independent Fiscal Bodies," Review of Business and Economic Literature, Intersentia, vol. 0(3), pages 288-309, September.
  • Handle: RePEc:sen:rebelj:v:lvi:y:2011:i:3:p:288-309
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    Cited by:

    1. Juan Camilo Anzoategui-Zapata & Juan Camilo Galvis-Ciro, 2021. "Effects of fiscal credibility on inflation expectations: evidence from an emerging economy," Public Sector Economics, Institute of Public Finance, vol. 45(1), pages 125-148.
    2. Haryo KUNCORO, 2016. "The Credibility Of Fiscal Rules Policy And Business Cycle Volatility," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 63(2), pages 209-224, July.
    3. Kuncoro Haryo, 2016. "The Credibility of Fiscal Rules Policy and Business Cycle Volatility," Scientific Annals of Economics and Business, Sciendo, vol. 63(2), pages 209-224, June.
    4. Haryo Kuncoro, 2018. "A feasibility study of establishing fiscal council in Indonesia," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 10(2), pages 137-147, Oktober.
    5. Haryo Kuncoro, 2017. "Does the sustainable fiscal policy foster its credibility?," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 9(1), pages 84-97, April.

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