Do fiscal councils reduce fiscal policy procyclicality?

Abstract

ABSTRACT Using a panel of 35 advanced economies over the period 1990–2020, we investigate the effect of fiscal councils and their individual characteristics on fiscal policy. We find that the response of fiscal policy was procyclical; however, fiscal councils with enhanced remit, strong independence and accountability, and sufficient resources can mitigate procyclicality. A series of robustness checks revealed that the ability of fiscal councils to mitigate fiscal policy procyclicality is particularly relevant in the EU and euro area countries, in countries with weak governance and in particular in the period after the Global Financial Crisis. The results are robust when accounting for the likely endogeneity between fiscal councils and fiscal procyclicality.