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The political economy of fiscal transparency and independent fiscal councils

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  • Beetsma, Roel
  • Debrun, Xavier
  • Sloof, Randolph

Abstract

The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFCs’ role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are “partisan” and “opportunistic.” If voters only care about policymakers’ competence, both the incumbent and the voters would be better off with an IFC as the debt bias would fall. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers’ competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are vulnerable to shifts in political conditions. JEL Classification: E62, H6

Suggested Citation

  • Beetsma, Roel & Debrun, Xavier & Sloof, Randolph, 2017. "The political economy of fiscal transparency and independent fiscal councils," Working Paper Series 2091, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172091
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    Cited by:

    1. Debrun, Xavier, 2019. "Independent Fiscal Institutions in the European Union: Is Coordination Required?," MPRA Paper 93143, University Library of Munich, Germany.
    2. Debrun, Xavier & Jonung, Lars, 2019. "Under threat: Rules-based fiscal policy and how to preserve it," European Journal of Political Economy, Elsevier, vol. 57(C), pages 142-157.
    3. Beetsma, Roel & Debrun, Xavier & Fang, Xiangming & Kim, Young & Lledó, Victor & Mbaye, Samba & Zhang, Xiaoxiao, 2019. "Independent fiscal councils: Recent trends and performance," European Journal of Political Economy, Elsevier, vol. 57(C), pages 53-69.
    4. Mihaela Onofrei & Tudorel Toader & Anca Florentina Vatamanu & Florin Oprea, 2021. "Impact of Governments’ Fiscal Behaviors on Public Finance Sustainability: A Comparative Study," Sustainability, MDPI, Open Access Journal, vol. 13(7), pages 1-16, March.
    5. Capraru, Bogdan & Georgescu, George, 2020. "Fiscal councils in European Union. A short retrospective review and current challenges in terms of functionality and effectiveness," Working Papers of Romania Fiscal Council 200801, Romania Fiscal Council.
    6. Luc Eyraud & Xavier Debrun & Andrew Hodge & Victor Duarte Lledo & Catherine A Pattillo, 2018. "Second-Generation Fiscal Rules; Balancing Simplicity, Flexibility, and Enforceability," IMF Staff Discussion Notes 18/04, International Monetary Fund.
    7. European Fiscal Board (EFB), 2020. "2020 annual report of the European Fiscal Board," Annual reports 2020, European Fiscal Board.
    8. Mr. Atish R. Ghosh & Ugo Panizza & Mr. Andrea F Presbitero & Antonio Fatás, 2019. "The Motives to Borrow," IMF Working Papers 2019/101, International Monetary Fund.
    9. Capraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2020. "An evaluation of IFIs impact on EU countries budget deficits," Working Papers of Romania Fiscal Council 201101, Romania Fiscal Council.
    10. Cezara Vinturis, 2019. "A multi-speed fiscal Europe? Fiscal Rules and Fiscal Performance in the EU Former Communist Countries," Working Papers hal-03097483, HAL.
    11. Slawomir Franek & Marta Postula, 2020. "Does Eurozone Membership Strengthen the Significance of Fiscal Instruments?," Annals of Economics and Finance, Society for AEF, vol. 21(1), pages 131-151, May.

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    More about this item

    Keywords

    competence; congruence; fiscal transparency; independent fiscal councils; opportunistic bias; partisan bias; public debt;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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