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The Effects of Budget Rules on Fiscal Performance and Macroeconomic Stabilization

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  • Jonathan Millar
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    Abstract

    Budget rules can be defined as legislated or constitutional constraints on government deficits, taxes, expenditures, or debt. This paper reviews the budget rules recently legislated in six of Canada's provinces and both of its territories, as well as budget rules in other OECD countries. In theory, budget rules appear to be justified if their cost in terms of foregone fiscal stabilization is outweighed by benefits such as discouraging government debt accumulation and reduced risk premiums on government borrowing. Recent empirical evidence on the effectiveness of budget rules and their consequences for fiscal stabilization is examined in detail. In light of this evidence, the paper assesses the possible implications of budget-rule legislation in Canada on fiscal performance, macroeconomic stabilization, and monetary policy.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-15.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 97-15.

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    Length: 58 pages
    Date of creation: 1997
    Date of revision:
    Handle: RePEc:bca:bocawp:97-15

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    Keywords: Fiscal policy;

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    References

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    3. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
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    5. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
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    8. Canzoneri, Matthew B & Diba, Behzad, 1996. "Fiscal Constraints on Central Bank Independence and Price Stability," CEPR Discussion Papers 1463, C.E.P.R. Discussion Papers.
    9. Barry Eichengreen and Tamim Bayoumi., 1993. "The Political Economy of Fiscal Restrictions: Implications for Europe from the United States," Center for International and Development Economics Research (CIDER) Working Papers C93-020, University of California at Berkeley.
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    11. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1046-59, November.
    12. International Monetary Fund, 1996. "Budget Processes and Commitment to Fiscal Discipline," IMF Working Papers 96/78, International Monetary Fund.
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    17. Morris Goldstein & Geoffrey Woglom, 1991. "Market-Based Fiscal Discipline in Monetary Unions," IMF Working Papers 91/89, International Monetary Fund.
    18. Ronald J. Shadbegian, 1996. "Do Tax And Expenditure Limitations Affect The Size And Growth Of State Government?," Contemporary Economic Policy, Western Economic Association International, vol. 14(1), pages 22-35, 01.
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    21. Corsetti, Giancarlo & Roubini, Nouriel, 1992. "Tax Smoothing Discretion Versus Balanced Budget Rules in the Presence of Politically Motivated Fiscal Deficits: The Design of Optimal Fiscal Rules for Europe after 1992," CEPR Discussion Papers 682, C.E.P.R. Discussion Papers.
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    Cited by:
    1. Robert Amano & Don Coletti & Tiff Macklem, 1999. "Monetary Rules When Economic Behaviour Changes," Cahiers de recherche CREFE / CREFE Working Papers 81, CREFE, Université du Québec à Montréal.
    2. David Prušvic, 2010. "European Fiscal Policy Rules: First 15 Years," Politická ekonomie, University of Economics, Prague, vol. 2010(1), pages 51-69.
    3. Jean-Paul Lam & William Scarth, 2002. "Alternative Public Spending Rules and Output Volatility," Working Papers 02-37, Bank of Canada.
    4. Landon, Stuart & Smith, Constance E., 2007. "Government debt spillovers in a monetary union," The North American Journal of Economics and Finance, Elsevier, vol. 18(2), pages 135-154, August.

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