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The impact of numerical expenditure rules on budgetary discipline over the cycle

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  • Holm-Hadulla, Fédéric
  • Hauptmeier, Sebastian
  • Rother, Philipp

Abstract

We study the impact of numerical expenditure rules on the propensity of governments to deviate from expenditure targets in response to surprises in cyclical conditions. Theoretical considerations suggest that due to political fragmentation in the budgetary process expenditure policy might be prone to a pro-cyclical bias. However, this tendency may be mitigated by numerical expenditure rules. These hypotheses are tested against data from a panel of EU Member States. Our key findings are that (i) deviations between actual and planned government expenditure are positively related to unanticipated changes in the output gap, and (ii) numerical expenditure rules reduce this pro-cyclical bias. Moreover, the pro-cyclical spending bias is found to be particularly pronounced for spending items with a high degree of budgetary flexibility. JEL Classification: C23, E62, H50

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1169.

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Date of creation: Apr 2010
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Handle: RePEc:ecb:ecbwps:20101169

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Keywords: expenditure rules; fiscal discipline; spending bias; stabilisation;

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Cited by:
  1. Hauptmeier, Sebastian & Sanchez-Fuentes, A. Jesus & Schuknecht, Ludger, 2011. "Towards expenditure rules and fiscal sanity in the euro area," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 597-617, July.
  2. Jacopo Cimadomo, 2011. "Real-time data and fiscal policy analysis: a survey of the literature," Working Papers 11-25, Federal Reserve Bank of Philadelphia.
  3. Beetsma, Roel & Bluhm, Benjamin & Giuliodori, Massimo & Wierts, Peter, 2011. "From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU," CEPR Discussion Papers 8413, C.E.P.R. Discussion Papers.
  4. Ludger Schuknecht & Philippe Moutot & Philipp Rother & Jürgen Stark, 2011. "The Stability and Growth Pact: Crisis and Reform," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 9(3), pages 10-18, October.
  5. Mencinger, Jernej & Aristovnik, Aleksander, 2013. "Fiscal Policy Stance in the European Union: The Impact of the Euro," MPRA Paper 44708, University Library of Munich, Germany.
  6. Torbe M. Andersen, 2012. "Fiscal sustainability and fiscal policy targets," Economics Working Papers 2012-15, School of Economics and Management, University of Aarhus.

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