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Fiscal Watchdogs and Sound Fiscal Policy: Is the Barking Loud Enough to Tame Politicians?

Debrun, Xavier and Gerard, Marc and Harris, Jason (2016): Fiscal Watchdogs and Sound Fiscal Policy: Is the Barking Loud Enough to Tame Politicians?

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Abstract

The chapter revisits the potential contribution of politically independent fiscal watchdogs (“Fiscal Councils”, or FCs) to improve fiscal performance. A simple theoretical model first illustrates that FCs cannot credibly exert a direct constraint on day-to-day policy choices. It is by contributing to the broader public debate on fiscal policy—through the provision of unbiased quantitative and qualitative analysis, forecasts, and possibly, recommendations—that these institutions can reduce informational asymmetries hindering voters’ ability to reward good policies and penalize bad ones. The chapter explores the empirical relevance of this argument by looking at the media impact of FCs in relation to “real-time” fiscal developments. It appears that FCs activity and media impact increase in times of budget slippages or relative fiscal activism, a necessary condition for the validity of the theory. However, FCs’ media impact is only weakly correlated with subsequent policy changes.

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