Fiscal institutions: different classifications and their effectiveness
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Fiscal institutions: different classifications and their effectiveness Patrícia Martins1 · Leonida Correia1 Received: 28 October 2019 / Revised: 12 August 2020 / Accepted: 17 August 2020 © Eurasia Business and Economics Society 2020
Abstract Fiscal institutions have been increasingly recognized as being useful for improving fiscal performance. These institutions are defined in different ways, but when a narrower definition is used, they correspond to independent fiscal institutions (IFIs), also called fiscal councils. In this paper, we employ three different classifications of fiscal institutions: from the European Commission, the International Monetary Fund, and one adapted from Calmfors and Wren-Lewis. Our main aim is to assess the impact of fiscal institutions on fiscal performance within a panel composed of the 28 countries of the European Union during the period of 1999–2016, using the bias-corrected least squares dummy variable dynamic panel estimator. We also explore the complementarity between fiscal institutions and the other elements of fiscal governance: numerical fiscal rules, medium-term budgetary frameworks, and the Stability and Growth Pact deficit and debt rules. The results confirm that fiscal institutions improve the discretionary implementation of fiscal policy: policy measures are less procyclical and more concerned with the sustainability of public debt. We also conclude that there is a complementary relationship between IFIs and the Stability and Growth Pact deficit rule, and that the performance of discretionary fiscal policy seems higher in countries with fiscal institutions than in countries with a predisposition for fiscal prudence. Keywords Fiscal institutions · Fiscal rules · Fiscal performance · European Union JEL Classification E62 · H11 · H61
* Patrícia Martins [email protected] 1
Centre for Transdisciplinary Development Studies (CETRAD), Department of Economics, Sociology and Management (DESG), University of Trás-Os-Montes and Alto Douro (UTAD), Quinta de Prados, 5000‑801 Vila Real, Portugal
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Eurasian Economic Review
1 Introduction Independent fiscal institutions (IFIs), also frequently designated fiscal councils, are independent public agencies aimed at promoting sound fiscal policies and sustainable public finances. According to theory and experience, these institutions contribute to fiscal discipline and policy credibility, and have a useful signaling role resulting in more stable expectations and less uncertainty. They do not take economic policy decisions and are usually independent watchdogs, sometimes advisory, which means that their recommendations, if any, are non-binding. Despite not having a fiscal decision-making role, these institutions—often in combination with credible fiscal rules—are capable of promoting sound fiscal policies and sustainable public finances through the performance of their core functions: specifically, the production of macroeconomic and fiscal forecasts, and the monitoring and evaluation of fiscal policies. Although
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