This paper investigates the role of self-enforced national expenditure rules in limiting the expenditure bias and procyclical expenditure increases/decreases due to revenue windfalls/shortfalls. A simple model predicts that expenditure rules can have the intended effects, but only if the political and institutional costs of non compliance are sufficiently large. Empirical estimations provide some support that expenditure rules affect expenditure outcomes in the hypothesised manner, especially when there are revenue shortfalls. We cannot disentangle, however, whether our results reflect a causal effect of expenditure rules on expenditure outcomes, or whether they are driven by a third variable of political preferences for addressing high expenditure to GDP ratios.
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number
166.
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Find related papers by JEL classification: E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy H50 - Public Economics - - National Government Expenditures and Related Policies - - - General H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
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