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Fiscal Policy: Institutions versus Rules

Published online by Cambridge University Press:  26 March 2020

Charles Wyplosz
Charles Wyplosz*
Affiliation:
Graduate Institute for International Studies, Geneva and CEPR
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Abstract

Fiscal discipline is as much needed as monetary discipline. Many countries have attempted to counter the deficit bias by adopting fiscal rules that typically set a limit to their annual budget deficits. The record is not satisfactory; rules are either too lax or too tight and then ignored. This article suggests that the solution is to adopt the approach followed by inflation targeting central banks, with great success. Independent and accountable Fiscal Policy Committees, given the task of achieving debt targets and the authority to decide - or recommend - annual deficits, will be free from the deficit bias. This will allow them to exercise discretion in the short run while delivering debt sustainability in the long run.

Keywords

Fiscal policypolicy rulespublic debtspolicy institutionstime inconsistencyE61H62
Type
Articles
Information
National Institute Economic Review , Volume 191 , January 2005 , pp. 64 - 78
Copyright
Copyright © 2005 National Institute of Economic and Social Research

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Footnotes

I have benefited from many useful comments and suggestions. Without implicating them, I acknowledge with thanks the useful comments received from Ray Barrell, Giorgio Basevi, Marco Buti, Hans Genberg, Francesco Giavazzi, Jacques Melitz, Jürgen von Hagen and Martin Weale, as well as help for some data kindly provided by Mark Hallerberg and Jürgen von Hagen.

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