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Commited to Flexible Fiscal Rules

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  • Pagenhardt, Laura
  • Große Steffen, Christoph
  • Rieth, Malte

Abstract

We study the impact of fiscal rules on macroeconomic performance following natural disaster shocks, using dynamic panel models and quarterly data for 89 countries. We find that countries with fiscal rules perform significantly better in the aftermath of such shocks than countries without rules. GDP, private consumption and investment are persistently higher. The superior performance is associated with more expansionary fiscal policy, which hinges critically on larger fiscal space and escape clauses. We rationalize the findings in a quantitative model of sovereign default. The model replicates the empirical dynamics and shows that tight fiscal rules create fiscal space in good times that can be used in bad times for deficit-spending.

Suggested Citation

  • Pagenhardt, Laura & Große Steffen, Christoph & Rieth, Malte, 2021. "Commited to Flexible Fiscal Rules," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242330, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc21:242330
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    Cited by:

    1. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Do Fiscal Rules Undermine Public Investments? A Review of Empirical Evidence," ifo Working Paper Series 393, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Schwächen Fiskalregeln öffentliche Investitionen?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 76(06), pages 22-28, June.

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    More about this item

    Keywords

    Fiscal policy; fiscal regimes; natural disasters;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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