Fiscal Councils and Economic Volatility
Journal Title: Finance a uver - Year 2014, Vol 64, Issue 3
Abstract
We evaluate proposals for an independent fiscal authority put forward as a solution to excessive public spending. Our main conclusion is that shifting the responsibility to set broad measures of fiscal policy from the hands of the government to an independent fiscal council is not necessarily welfare improving. We show that the change is welfare improving if the ability of policymakers to assess the state of the economy does not change. How-ever, if this institutional change involves a considerable decrease of capacity of the new agency to recognize economic shocks, citizens’ welfare can decrease as a result. This is especially significant in times of increased economic volatility such as during the recent global financial crisis. Faced with the ambiguous theoretical result, we try to gain deeper insight by calibrating our simple model.
Authors and Affiliations
Adam Gersl, Martina Jasova, Jan Zapal
Keywords
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