Strategic Signals and Multilateral Fiscal Surveillance

Steclebout-Orseau, Eloise, and Hallerberg, Mark. (2007) Strategic Signals and Multilateral Fiscal Surveillance. In: UNSPECIFIED, Montreal, Canada. (Unpublished)

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Abstract

We present a game that first models the relationship among a population, a government and a watchdog. The focus is on the incentives that the government faces when making fiscal policy decisions. The population has incomplete information about the type of government that is in office, but an independent watchdog can reveal whether it is competent or affected by a deficit bias. In the second part of the paper, we elaborate on the strategic changes in fiscal policy-making induced by the introduction of fiscal surveillance at the European level. Based on recent developments, we discuss whether multilateral surveillance is effective as a safeguard against fiscal indiscipline. We find that, if the watchdog acts strategically and internalizes the impact of its signals on the intergovernmental game, it will only provide information on the economic and budgetary state of Member States in specific cases – namely when the cost of sanctions is sufficiently high compared to electoral stakes and provided that few countries are mentioned.

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