No abstract

This book presents a theoretical framework to discuss how governments coordinate budgeting decisions. There are two modes of fiscal governance conducive to greater fiscal discipline, a mode of delegation and a mode of contracts. These modes contrast with a fiefdom form of governance, in which the decision-making process is decentralized. An important insight is that the effectiveness of a given form of fiscal governance depends crucially on the underlying political system. Delegation functions well when there are few, or no, ideological differences among government parties, whereas contracts are effective when there are many such differences. Based on original research, the book classifies European Union countries from 1985 to 2004. Empirically, delegation and contract states perform better than fiefdom states if they match the underlying political system. In addition, chapters consider why countries have the fiscal institutions that they do, fiscal governance in Central and Eastern Europe, and the role of such institutions in the European Union.

4Non-technical summary 5

T his paper proposes and tests a new formal model of the competition for capital, using the analogy of a "tournament" as a substitute for the "race-to-the-bottom" model. Our key insight is that political costs that accompany legislating have both direct and indirect effects on the likelihood and scale of reforms. While countries with higher political costs are less likely themselves to enact reforms, the presence of these costs also reduces competing countries' incentives to reform regardless of their own political costs. Domestic politics therefore mitigates the pressures for downward convergence of tax policy despite increased capital mobility. We examine the capital tax policies in OECD countries during the period from 1980 to 1997 and find that states are sensitive to tax reforms in competitor countries, although their responses to reforms are mediated by their own domestic costs to reform. We define two potential sources of political costs of reform: transaction costs, due to the presence of multiple veto players in the legislative process, and constituency costs, due to ideological opposition to policy changes that benefit capital. Our evidence reveals that a reduction in these costs either domestically or abroad increases the likelihood that a country enacts tax reforms.

This article examines the role that economic and political factors played in tax reform in Organization for Economic Cooperation and Development (OECD) countries from 1986 to 1990. Some writers argue that economic integration forced states to reform their tax systems. The authors' findings indicate that economic openness had an indirect effect on the level of change in marginal tax rates. The institutional structure of a country was most important—countries that had only one veto player or only one institution or party whose approval was necessary for a bill to become law enacted more sweeping reform than states that had more than one veto player. These results suggest that even when international or domestic economic factors might dictate a change in policy, reform will not be as sweeping in countries in which agreement among several institutions and/or parties is necessary.

The literature on global integration and national policy autonomy often ignores a central result from open economy macroeconomics -capital mobility constrains monetary policy when the exchange rate is fixed and fiscal policy when the exchange rate is flexible. Similarly, examinations of the electoral determinants of monetary and fiscal policy typically ignore international pressures altogether. We develop a formal model to analyze the interaction between fiscal and monetary policymakers under various exchange rate regimes and the degrees of central bank independence and test the model's implications using data from 19 OECD countries. We find evidence of preelectoral monetary expansions only when the exchange rate is flexible and the degree of central bank independence is low; and pre-electoral fiscal expansions when the exchange rate is fixed.We conclude by exploring the implications of our findings for the conduct of fiscal policy after Economic and Monetary Union in Europe.

No abstract

Budget institutions, Fiscal rules, Sovereign risk premia, EMU, Fiscal policy, E43, E62, H61, H62, G12, G15,