Fiscal Policy to Stabilise the Domestic Economy in the EMU: What Can We Learn from Monetary Policy?

Abstract: An important issue for the EMU countries is to what extent fiscal policy can be used to stabilise the domestic economy in the case of asymmetric macroeconomic shocks. The paper reviews possible reforms of national fiscal policy institutions in order to promote efficient fiscal stabilisation policy: (i) the introduction of a more transparent legal framework for the government's stabilisation decisions; (ii) the establishment of an independent advisory Fiscal Policy Council; and (iii) the delegation of actual stabilisation decisions to an independent Fiscal Policy Committee. The conclusion is that the Fiscal Policy Committee solution has much to speak for itself. It seems possible to delegate fiscal stabilisation policy decisions, in much the same way as monetary policy has been delegated to central banks, at the same time as fiscal policy decisions focusing on income distribution and social efficiency are kept in the political sphere. Such delegation can be made compatible with democratic accountability.