Enhancing Prudent Fiscal Policy

Abstract

The objective of this paper is to derive the characteristics of an effective
governance framework ensuring incentives for conducting a prudent fiscal policy.
We study this problem with the use of econometric tools and a sample of 28
European Union Member States between 2003 and 2017. By looking at specific
reforms and measures, not only we verify the synthetic effectiveness of fiscal
constraints but also we analyse specific elements of the governance framework.
Our study shows that fiscal balances are affected not only by the economic cycle,
but, among others, by the level of public debt and its cost. We find that the
existence of numerical fiscal rules, in that specifically revenue and expenditures
rules, their strong legal entrenchment, surveillance mechanisms, sanctions, and
flexibility with respect to business cycle have a significant impact on curbing
deficits.