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

47 Pages Posted: 23 Aug 2007

See all articles by Xavier Debrun

Xavier Debrun

International Monetary Fund (IMF) - Research Department

Manmohan Kumar

International Monetary Fund (IMF) - Research Department

Date Written: July 2007

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.

Keywords: Working Paper, Fiscal policy, Fiscal transparency, Budget deficits, Budgetary policy

Suggested Citation

Debrun, Xavier and Kumar, Manmohan, The Discipline-Enhancing Role of Fiscal Institutions: Theory and Empirical Evidence (July 2007). IMF Working Paper No. 07/171, Available at SSRN: https://ssrn.com/abstract=1007920

Xavier Debrun

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8321 (Phone)
202-623-6343 (Fax)

Manmohan Kumar

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7771 (Phone)
202-589-7771 (Fax)

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