Publication detail

A Fiscal Rule That Has Teeth: A Suggestion for a “Fiscal Sustainability Council

Author(s): doc. Ing. Ondřej Schneider MPhil., Ph.D., Jan Zápal, Petr Hedbavny
Type: Articles in refereed journals
Year: 2005
Number:
ISSN / ISBN: 1617-9595
Published in: CESifo Working Papers
Publishing place: Munich, Germany
Keywords:
JEL codes:
Suggested Citation:
Grants: Fiscal Policy in Enlarged European Union: Rules vs. discretion.
Abstract: In this paper, we set out to examine an efficient fiscal-policy framework for a monetary union. We illustrate that fiscal policy’s bias toward budget deficit only temporarily ceased at the end of the 20th century as European countries endeavored to qualify for euro-zone membership, which compelled strict limits on budgetary deficits. We then explore which mechanisms might instill a sense of fiscal disciple in governments. We find that most mechanisms suffer from the incentive-incompatible setup whereby governments restrict their own fiscal-policy freedom. We argue that even multilateral fiscal rules, such as the EU’s Stability and Growth Pact, suffer from the same endogeneity flaw. Consequently, we argue that a fiscal rule must incorporate an external authority that would impartially assess fiscal-policy developments. Using U.S. debt and bond-market data at the state level, we show that financial markets represent a good candidate as, vis-à-vis the American states, they do differentiate state debt according to the level of debt. We thus argue for a fiscal institution––what we call the Fiscal Sustainability Council––that would actively bring financial markets into the fiscal-policy process, and we explain the technique whereby this could be effected.
Downloadable: Fiscal Rule

Partners

Deloitte

Sponsors

CRIF
McKinsey
Patria Finance