Fiscal Policy: Too Political?

The paper provides an analysis of the role of fiscal rules. The authors first provide a rationale for the existence of fiscal rules, namely to avoid a governmental bias toward budget deficits. The paper then surveys existing fiscal rules and analyzes their applicability in the context of the Czech Republic. The authors argue that the institutional arrangement of fiscal policy should mirror the arrangement that has emerged as regards monetary policy, namely a certain separation of powers in which an independent body would be responsible for setting the overall budget deficit level. In the case of the Czech Republic, the authors argue that the country needs a simple and transparent fiscal rule rather than a more sophisticated and seemingly more appropriate rule.