Fiscal Rules, Fiscal Councils and All that: Commitment Devices, Signaling Tools or Smokescreens?

Abstract

Xavier Debrun and Manmohan S. Kumar deal with the impact of institutions on fiscal discipline, first discussing the point in principle: (i) fiscal institutions can work as commitment devices (i.e. tie policymakers’ hands); (ii) they can work as signalling devices (i.e. reduce the information asymmetry between the electorate and policymakers); and (iii) they can be smokescreens. The second part of the paper develops an empirical analysis to test these three hypotheses, referring to descriptive evidence and estimating a multivariate panel model for a large sample of EU countries over the period 1990-2004. The authors use time-varying indices of fiscal rule restrictiveness and coverage. The analysis finds significant support for both commitment and signalling, little for the smokescreen hypothesis.