THE EFFECTS OF FISCAL INSTITUTIONS ON FISCAL ADJUSTMENTS
University of Patras
Bank of Greece, University of Patras
and Hellenic Parliamentary Budget Office
Using a panel of 40 advanced economies over the period 1990-2020 this paper investigates the effect of various characteristics of fiscal councils and fiscal rules on the probability of starting a fiscal adjustment, as well as on the probability that this fiscal adjustment will be successful. The relevance of fiscal institutions’ characteristics is verified when considering alternative definitions of successful fiscal adjustments. Our results are robust after controlling for endogeneity of fiscal institutions’ characteristics (by the Augmented Inverse Probability Weighted estimator) with fiscal adjustments. We find that a fiscal rule with well specified escape clause, that has multi-year expenditure ceilings and excludes public investment can induce a successful fiscal adjustment. A fiscal council with enhanced remit, independence and accountability and extended tasks and instruments increase the probability of successful fiscal adjustments. Finally, we find that a fiscal council with extended tasks and instruments increase the probability of successful fiscal adjustments based on spending cuts.
JEL-classifications: E02, E61, E62, H61
Keywords: Fiscal policy, Fiscal councils’ characteristics, Fiscal rules’ characteristics, Fiscal adjustments
Acknowledgements: We would like to thank Hiona Balfoussia, Nikolaos Giannakopoulos, Panagiotis Konstantinou, the anonymous reviewer of the Bank of Greece’s Working Paper Series and participants at the ASSET 2022 conference organized by the University of Crete. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Bank of Greece and the Hellenic Parliamentary Budget Office.
Economic Analysis and Research Department
Bank of Greece
21 El. Venizelos Av.
10250 Athens, Greece