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How do Expenditure Rules affect Fiscal Behaviour?

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  • Peter Wierts
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    Abstract

    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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    File URL: http://www.dnb.nl/binaries/Working%20Paper%20166-2008_tcm46-170648.pdf
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    Bibliographic Info

    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 166.

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    Date of creation: Feb 2008
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    Handle: RePEc:dnb:dnbwpp:166

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    Cited by:
    1. Cepparulo, Alessandra & Gastaldi, Francesca & Giuriato, Luisa & Sacchi, Agnese, 2011. "Budgeting versus implementing fiscal policy:the Italian case," MPRA Paper 32474, University Library of Munich, Germany.
    2. Holm-Hadulla, Fédéric & Hauptmeier, Sebastian & Rother, Philipp, 2010. "The impact of numerical expenditure rules on budgetary discipline over the cycle," Working Paper Series 1169, European Central Bank.
    3. Hauptmeier, Sebastian & Sanchez Fuentes, Jesus & Schuknecht, Ludger, 2010. "Towards expenditure rules and fiscal sanity in the euro area," Working Paper Series 1266, European Central Bank.
    4. António Afonso & Ana Sofia Guimarães, 2014. "The relevance of fiscal rules for fiscal and yield developments," Working Papers Department of Economics 2014/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    5. Alessandro Turrini, 2008. "Fiscal policy and the cycle in the Euro Area: The role of government revenue and expenditure," European Economy - Economic Papers 323, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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