Fiscal Rules, Fiscal Space and Procyclical Fiscal Policy

Nerlich, Carolin; Reuter, Wolf Heinrich

doi:10.2139/ssrn.3409786

Cited by 27 publications

(14 citation statements)

References 15 publications

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“…As regards political economy considerations, fiscal rules limit political budget cycles, i.e., purposeful fiscal policy manipulations to boost an incumbent's chances of reelection (Gupta et al, 2016;Bonfatti and Forni, 2019;Gootjes et al, 2021) and they induce more countercyclical fiscal policies (Bergman and Hutchison 2015;Nerlich and Reuter, 2015;Combes et al, 2017;Guerguil et al, 2017;Gootjes and de Haan, 2022b).…”

Section: Literature Reviewmentioning

confidence: 99%

The effects of fiscal institutions on fiscal adjustments

Chrysanthakopoulos¹,

Tagkalakis²

2022

Working Paper

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Using a panel of 40 advanced economies over the period 1990-2020 this paper investigates the effect of various characteristics of fiscal councils and fiscal rules on the probability of starting a fiscal adjustment, as well as on the probability that this fiscal adjustment will be successful. The relevance of fiscal institutions’ characteristics is verified when considering alternative definitions of successful fiscal adjustments. Our results are robust after controlling for endogeneity of fiscal institutions’ characteristics (by the Augmented Inverse Probability Weighted estimator) with fiscal adjustments. We find that a fiscal rule with well specified escape clause, that has multi-year expenditure ceilings and excludes public investment can induce a successful fiscal adjustment. A fiscal council with enhanced remit, independence and accountability and extended tasks and instruments increase the probability of successful fiscal adjustments. Finally, we find that a fiscal council with extended tasks and instruments increase the probability of successful fiscal adjustments based on spending cuts.

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Section: Literature Reviewmentioning

confidence: 99%

The effects of fiscal institutions on fiscal adjustments

Chrysanthakopoulos¹,

Tagkalakis²

2022

Working Paper

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“…Auerbach and Gorodnichenko (2013) andHuidrom et al (2016) …nd that …scal multipliers tend to be larger when …scal space is wider.2 This is also the de…nition used byGhosh et al (2013) andNerlich and Reuter (2015). Park (2012) de…nes …scal space as revenue generating capacity which is the di¤erence between current tax revenues and the maximum level that is estimated in a model.…”

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confidence: 99%

A cross-country database of fiscal space

Köse

Kurlat²,

Ohnsorge

et al. 2022

Journal of International Money and Finance

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“…(Guerguil et al, 2017). 3 Furthermore, several studies conclude that a combination of multiple fiscal rules appears more effective in fostering countercyclical policies (Nerlich and Reuter, 2015;Combes et al, 2017).…”

Section: Fiscal Rules and Government Efficiency/qualitymentioning

confidence: 99%

“…Fiscal rules are widely accepted as an instrument to promote budgetary discipline (see, for instance, Bergman et al (2016)), but relatively little is known about their impact on the stabilization function of fiscal policy. Some recent studies report that well-designed fiscal rules reduce procyclicality (Nerlich and Reuter, 2015;Combes et al, 2017;Guerguil et al, 2017), but Bergman and Hutchison (2015) suggest that this result only holds when these rules are supported by a sufficiently high level of government efficiency/quality. However, a drawback of these studies is that they are based on ex-post fiscal data, which has often been revised, and therefore almost certainly gives a misleading inference about policy intentions (Croushore, 2011).…”

Section: Introductionmentioning

confidence: 99%

“…Stronger results are found for fiscal rules with a higher legal basis (Asatryan et al, 2018) or rules that are investment-friendly and contain cyclical adjustment characteristics (Guerguil et al, 2017). Moreover, several studies conclude that the combination of multiple fiscal rules leads to more desirable results (Nerlich and Reuter, 2015;Combes et al, 2017). This line of research therefore suggests that adding more fiscal rules and including features that increase their flexibility and enforceability will improve fiscal performance.…”

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confidence: 99%

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Do fiscal rules pave the way for sound fiscal policy?

Gootjes¹

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Despite a different focus, all chapters are strongly linked. In addition, the later chapters in some cases build on results from earlier chapters. All chapters are written in such a way that they can be read independently of each other. This means that some repetition and overlap between the chapters cannot be avoided. Below, I summarize all chapters.Chapter 2: Fiscal rules constrain political budget cycles Incumbent governments tend to implement expansionary fiscal policy in the proximity of elections, believing that this will increase their re-election chances by handing out gifts, stimulating the economy, and signaling competence to voters (Nordhaus, 1975;Shi and Svensson, 2006). However, using fiscal policy to "buy" votes is often inefficient and can be harmful to the economy, especially when the economy does not need fiscal stimulus (e.g., because it is already performing well). Fiscal rules can make it a whole lot harder to pursue opportunistic policies during election years as they limit fiscal policy discretion. Therefore, the rules lower the room for such fiscal manipulations.In Chapter 2, I examine whether fiscal rules constrain these election cycles in fiscal policy, also referred to as political budget cycles. I consider a panel of 77 democracies and investigate their fiscal policies between 1985 and 2015. I estimate simple fiscal reaction functions and take the effect of elections and fiscal rules on the government budget balance into account. In line with previous studies (e.g., Shi and Svensson (2006)), I find that elections deteriorate government budgets, with an increase of approximately 0.5% of GDP in budget deficits. Fiscal rules, on the other hand, significantly improve the government budget. In particular, I note that these rules reduce the size of political budget cycles, while the effect of elections on the government budget seems fully contained in countries with considerably tight fiscal rules.Further analyses show that the effect of fiscal rules on dampening fiscal profligacy during elections persists irrespective of other factors that might explain this, such as the freedom of the media or the level of public debt. Moreover, I observe a strong effect of fiscal rules in countries with a higher level of globalization, fewer checks and balances, left-wing governments, and established democracies. Finally, I show that after the global financial crisis, the design of fiscal rules has improved, and with it their effect on political budget cycles.Overall, the results suggest that strong fiscal rules are desirable for mitigating budget deterioration during elections, but certain factors make them more (or less) necessary. Do fiscal rules constrain political budget cycles?*This chapter is published as Gootjes et al. (2021)

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Fiscal Rules, Fiscal Space and Procyclical Fiscal Policy

Cited by 27 publications

References 15 publications

The effects of fiscal institutions on fiscal adjustments

The effects of fiscal institutions on fiscal adjustments

A cross-country database of fiscal space

Do fiscal rules pave the way for sound fiscal policy?

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