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Fiscal rules and volatility: the role of stabilising properties and compliance

Author

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  • Wolf Heinrich Reuter

    (German Council of Economic Experts)

  • Oļegs Tkačevs

    (Bank of Latvia)

  • Kārlis Vilerts

    (Bank of Latvia)

Abstract

Using data of the EU28 Member States for the period 1996–2015, this paper confirms the findings of previous studies that the stipulation of fiscal rules reduces fiscal volatility and consequently contributes to macroeconomic stability. Yet, we document that this result only holds for rules which are designed to be unaffected by the current state of the business cycle, i.e. which are "a-cyclical". Those can, for example, be budget balance rules that set ceilings in cyclically adjusted terms. Furthermore, the stringency of fiscal rules makes their stabilising effect more pronounced. Actual compliance with fiscal rules seems to play no systematic role, such that effects of the rules can be observed even if they are not complied with. Overall, our paper suggests that strong, properly designed numerical rules act as an anchor for fiscal policy makers and contribute to more stable discretionary fiscal policy.

Suggested Citation

  • Wolf Heinrich Reuter & Oļegs Tkačevs & Kārlis Vilerts, 2022. "Fiscal rules and volatility: the role of stabilising properties and compliance," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(1), pages 21-52, February.
    • Handle: RePEc:kap:empiri:v:49:y:2022:i:1:d:10.1007_s10663-021-09522-9
    DOI: 10.1007/s10663-021-09522-9
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    2. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.

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    More about this item

    Keywords

    Fiscal rules; Fiscal policy volatility; Panel data; Compliance;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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