Economic stabilization in the post-crisis world: Are fiscal rules the answer?

Ulf Michael Bergman; Michael M. Hutchison

doi:10.1016/j.jimonfin.2014.11.014

Economic stabilization in the post-crisis world: Are fiscal rules the answer?

Ulf Michael Bergman, Michael M. Hutchison

Economic Policy Research Unit (EPRU)

35 Citations (Scopus)

Abstract

We investigate whether fiscal rules help to reduce the extent of policy procyclicality-how government expenditure policy responds to GDP-- in a dynamic panel framework with 81 advanced, emerging and developing countries over 1985-2012. We construct two new fiscal rule indices and investigate whether rules help to dampen procyclical policies. We condition our empirical specifications on the degree to which governments appear able to manage and enforce fiscal rules. We find that fiscal rules are very effective in reducing procyclicality of policy once a minimum threshold of government efficiency/quality has been reached. Government efficiency alone is not enough to reduce procyclicality of fiscal policy. However, high government efficiency combined with strong fiscal rules is a potent combination facilitating counter-cyclical policy responses to GDP movements.

Original language	English
Journal	Journal of International Money and Finance
Volume	52
Pages (from-to)	82-101
Number of pages	20
ISSN	0261-5606
DOIs	https://doi.org/10.1016/j.jimonfin.2014.11.014
Publication status	Published - 1 Apr 2015

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title = "Economic stabilization in the post-crisis world: Are fiscal rules the answer?",

abstract = "We investigate whether fiscal rules help to reduce the extent of policy procyclicality-how government expenditure policy responds to GDP-- in a dynamic panel framework with 81 advanced, emerging and developing countries over 1985-2012. We construct two new fiscal rule indices and investigate whether rules help to dampen procyclical policies. We condition our empirical specifications on the degree to which governments appear able to manage and enforce fiscal rules. We find that fiscal rules are very effective in reducing procyclicality of policy once a minimum threshold of government efficiency/quality has been reached. Government efficiency alone is not enough to reduce procyclicality of fiscal policy. However, high government efficiency combined with strong fiscal rules is a potent combination facilitating counter-cyclical policy responses to GDP movements.",

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T2 - Are fiscal rules the answer?

AU - Bergman, Ulf Michael

AU - Hutchison, Michael M.

N1 - JEL Classification: E32, E62, H5

PY - 2015/4/1

Y1 - 2015/4/1

N2 - We investigate whether fiscal rules help to reduce the extent of policy procyclicality-how government expenditure policy responds to GDP-- in a dynamic panel framework with 81 advanced, emerging and developing countries over 1985-2012. We construct two new fiscal rule indices and investigate whether rules help to dampen procyclical policies. We condition our empirical specifications on the degree to which governments appear able to manage and enforce fiscal rules. We find that fiscal rules are very effective in reducing procyclicality of policy once a minimum threshold of government efficiency/quality has been reached. Government efficiency alone is not enough to reduce procyclicality of fiscal policy. However, high government efficiency combined with strong fiscal rules is a potent combination facilitating counter-cyclical policy responses to GDP movements.

AB - We investigate whether fiscal rules help to reduce the extent of policy procyclicality-how government expenditure policy responds to GDP-- in a dynamic panel framework with 81 advanced, emerging and developing countries over 1985-2012. We construct two new fiscal rule indices and investigate whether rules help to dampen procyclical policies. We condition our empirical specifications on the degree to which governments appear able to manage and enforce fiscal rules. We find that fiscal rules are very effective in reducing procyclicality of policy once a minimum threshold of government efficiency/quality has been reached. Government efficiency alone is not enough to reduce procyclicality of fiscal policy. However, high government efficiency combined with strong fiscal rules is a potent combination facilitating counter-cyclical policy responses to GDP movements.

U2 - 10.1016/j.jimonfin.2014.11.014

DO - 10.1016/j.jimonfin.2014.11.014

M3 - Journal article

SN - 0261-5606

VL - 52

SP - 82

EP - 101

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

ER -

Economic stabilization in the post-crisis world: Are fiscal rules the answer?

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