Box 1 - Comparing Monetary and Fiscal Policy Delegation
Fiscal agencies raise a number of issues in comparison with independent central banks. One can compare and
contrast specifically IFAs with indepen¬dent central banks.
The core objective for monetary policy is broadly recognized in most countries—price stability. Indeed, the
costs of high inflation are felt quickly by large parts of the population, which boosts support for institutions
sup¬posed to prevent it. However, what could be called the analogous objective for fiscal policy—debt
sustainability—is less clear-cut. For one thing, high debt and deficits are likely to be less easily perceived as
harmful by the general public. In the short and medium run at least, the costs of high deficits can be blurred by a
number of factors: (1) large groups in the population might ben¬efit from them; (2) the costs are potentially
spread over a long time period; and (3) concerns about these costs could be deflected by an expected positive
impact on economic growth.
Also, defining the goals of an IFA is more complex than those of central banks, owing to different
characteristics of fiscal and monetary policy. This is despite the fact that the mandates of the two bodies can be
comparable: IFAs could be mandated with ensuring debt sustainability and contributing to economic
stabilization, compared with central banks mandated with ensuring price stability and contributing to growth.
Objective. The objective of monetary policy is usually an inflation rate within a prespecified range (with output
stabilization sometimes added as a secondary objective). For fiscal policy, however, there is no broad agreement
on one single objective. Unless fiscal stabilization over the cycle would be entirely dismissed, a fiscal agency
would likely have to square two potentially conflicting objec¬tives: fiscal sustainability and economic
stabilization. Even if the IFA’s objective were indeed limited to debt sustainability ex ante, political pressure to
pursue also a stabilization objective could get severe in bad times.
Target. The target of monetary policy is usually a certain interest rate or money supply growth. A natural target
for fiscal policy would be the fiscal balance. However, there are at least three complications compared with
mon-etary policy: First, the measurement of the fiscal balance is more complex and susceptible to “creative
accounting.” Second—in contrast to the inflation rate—there is no broad consensus on a fiscal deficit that
should not be exceeded. Third, fiscal policy generally works with longer lags than monetary policy: an IFA
would have to decide on the fiscal balance several months before the new fiscal year.
Instrument. Central banks have a number of instruments at their disposal. However, what could be called the
instruments of fiscal policy—tax rates and expenditures—would tend to remain under the control of the elected
government.If delegation is deemed desirable, the following institutional arrangements need to be given specific
attention:
Mandate. The agency needs a simple and unambiguous mandate, clearly related to the economic
rationale for delegation—which is to effectively reduce fiscal policy biases. This facilitates the
monitoring of the agency and enhances its accountability.
Discretion. The agency should be given complete discretion with regard to mandates delegated to it, and
it should be able to use such discretion to fulfill its mandate.