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December 31, 2007

Promoting Fiscal Discipline - The Role of Fiscal Agencies

Posted by Mario Pessoa

A recent IMF book entitled "Promoting Fiscal Discipline", edited by by Manmohan Kumar and Teresa Ter-Minassian, addresses some of the key issues involved in promoting fiscal discipline (see December 2007 blog post). In Chapter 6, Xavier Debrun, David Hauner, and Manmohan Kumar discuss the role for fiscal agencies. The creation of a fiscal authority using an institutional arrangement similar to central banks is suggested. The success with delegation of monetary policy has led some to argue that analogous fiscal agencies could play a useful role in increasing fiscal discipline. It is also examined the current role of fiscal councils in developed and developing countries.

The authors discuss the advantages of creating fiscal agencies as a measure to influence the democratic debate through a more technical, non-partisan, analysis, forecasts, and judgment of the results achieved by fiscal policy, particularly in situation there is formal numerical fiscal targets to be accomplished. It is identified two main types of institutions: independent fiscal authorities and fiscal councils. These arrangements can be utilized to reshape policymakers’ incentives in activities susceptible to “government failure” to independent agencies or to establish arrangements that raise the reputation and electoral costs of distorted policies.

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