Flexible Fiscal Rules and Countercyclical Fiscal Policy

By Martine Guerguil, Pierre Mandon, Rene Tapsoba

January 22, 2016

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Format: Chicago

Martine Guerguil, Pierre Mandon, and Rene Tapsoba. Flexible Fiscal Rules and Countercyclical Fiscal Policy, (USA: International Monetary Fund, 2016) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper assesses the impact of different types of flexible fiscal rules on the procyclicality of fiscal policy with propensity scores-matching techniques, thus mitigating traditional self-selection problems. It finds that not all fiscal rules have the same impact: the design matters. Specifically, investment-friendly rules reduce the procyclicality of both overall and investment spending. The effect appears stronger in bad times and when the rule is enacted at the national level. The introduction of escape clauses in fiscal rules does not seem to affect the cyclical stance of public spending. The inclusion of cyclical adjustment features in spending rules yields broadly similar results. The results are mixed for cyclically-adjusted budget balance rules: enacting the latter is associated with countercyclical movements in overall spending, but with procyclical changes in investment spending. Structural factors, such as past debt, the level of development, the volatility of terms of trade, natural resources endowment, government stability, and the legal enforcement and monitoring arrangements backing the rule also influence the link between fiscal rules and countercyclicality. The results are robust to a wide set of alternative specifications.

Subject: Expenditure, Fiscal policy, Fiscal rules, Public investment spending, Total expenditures

Keywords: Dependent variable, Expenditure rule, Fiscal rule, Significance level, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/008
Stock No:

WPIEA2016008
ISBN:

9781513581460
ISSN:

1018-5941

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