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Fiscal Responsibility Framework: International Experience and Implications for Hungary

  • George Kopits

    (Magyar Nemzeti Bank)

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    In an effort to correct worrisome trends in discretionary fiscal policy (deficit bias, procyclicality, and structural distortions), an increasing number of countries introduced a rules-based fiscal responsibility framework (FRF), characterized by fiscal policy rules, procedural rules, transparency standards, and a surveillance and enforcement mechanism. Preliminary evidence suggests that compliance with a well-designed FRF contributes to building policy credibility, to reducing risk premia, to boosting economic growth, and to lowering output volatility. Faced with large and persistent fiscal imbalances and a sharp buildup of public indebtedness, Hungary would benefit from exploring the adoption a FRF along the following lines. The FRF should encompass the entire public sector, fully accounting for contingent liabilities, and including prudent fiscal projections. Second, it is necessary to strengthen procedural rules, including implementation of the pay-go approach to budget legislation and preparat on of a rolling three-year budget program, setting annual limits on the nominal level of primary expenditures. Third, phasing in of a primary surplus rule, calibrated to the path of desired debt reduction, should be seriously considered. Fourth, a current balance rule should be adopted for local self-governments. Finally, compliance with the FRF would need to be monitored by an independent authority.

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    File URL: http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_muhelytanulmanyok/OP_62.pdf
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    Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Occasional Papers with number 2007/62.

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    Length: 28 pages
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:mnb:opaper:2007/62
    Contact details of provider: Web page: http://www.mnb.hu/

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    1. Barry Eichengreen & Ricardo Hausmann & Jürgen Von Hagen, 1999. "Reforming Budgetary Institutions in Latin America: The Case for a National Fiscal Council," Open Economies Review, Springer, vol. 10(4), pages 415-442, October.
    2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
    3. Paolo Manasse, 2006. "Procyclical Fiscal Policy; Shocks, Rules, and Institutions: A View From Mars," IMF Working Papers 06/27, International Monetary Fund.
    4. Tim Besley, 2002. "Political institutions and policy choices: evidence from the United States," IFS Working Papers W02/13, Institute for Fiscal Studies.
    5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    6. repec:imf:imfpdp:9703 is not listed on IDEAS
    7. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1419-1447, November.
    8. George Kopits & Steven A. Symansky, 1998. "Fiscal Policy Rules," IMF Occasional Papers 162, International Monetary Fund.
    9. Wyplosz, Charles, 2002. "Fiscal Policy: Institutions versus Rules," CEPR Discussion Papers 3238, C.E.P.R. Discussion Papers.
    10. Helge Berger & George Kopits & István P. Székely, 2007. "Fiscal Indulgence In Central Europe: Loss Of The External Anchor?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(1), pages 116-135, 02.
    11. Gabor Vadas & Gabor P.Kiss, 2005. "Mind the Gap – International Comparison of Cyclical Adjustment of the Budget," Public Economics 0512010, EconWPA.
    12. George Kopits, 2001. "Fiscal Rules; Useful Policy Framework or Unnecessary Ornament?," IMF Working Papers 01/145, International Monetary Fund.
    13. George Kopits & J. D. Craig, 1998. "Transparency in Government Operations," IMF Occasional Papers 158, International Monetary Fund.
    14. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1, December.
    15. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," IDB Publications (Working Papers) 6797, Inter-American Development Bank.
    16. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
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