Limits to Discretionary Decision-making in Rapidly Changing Economic Environment: Fiscal Policy and Special Interests

Abstract

Over the last few decades, a noticeable change in the approach to stabilization policy can be observed, namely a shift from discretion to rule-based policy. Rules in economic policy ensure predictability and reduce uncertainty, help policymakers avoid short-term pressures from special interest groups, act in line with long-term objectives, and facilitate communication and increase accountability. Nevertheless, we witness major (endogenous and exogenous) shocks that require quick decisions through discretionary decision-making. Economic policymakers must respond flexibly to a rapidly changing economic environment, and discretionary decision-making in this context might be beneficial. However, a constant re-evaluation (inconsistency) of economic policy decisions and new discretionary decisions might create an unstable economic environment. Policymakers face information asymmetry in the form of incomplete or distorted information supplied by the sphere of influence (interest groups). This study investigates the relationship between institutional quality, represented by the degree of transparent lobbying as a proxy indicator of information asymmetry, and economic policy consistency, characterized by the volatility of fiscal policy discretion. We find that the higher the transparency of the lobbying environment, the lower the variability of fiscal policy's discretionary component. Understanding the determinants of fiscal policy volatility is crucial for achieving sustainable development.