Fiscal Councils and Economic Volatility

Adam Gersl, Martina Jasova () and Jan Zapal

Czech Journal of Economics and Finance (Finance a uver), 2014, vol. 64, issue 3, 190-212

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. However, 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.

Keywords: dynamic inconsistency; fiscal and monetary policy interaction; independent fiscal council (search for similar items in EconPapers)
JEL-codes: E42 E58 E63 H30 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:64:y:2014:i:3:p:190-212

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