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The Case for Restricting Fiscal Policy Discretion

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  • Antonio Fatás
  • Ilian Mihov

Abstract

This paper studies the effects of discretionary fiscal policy on output volatility and economic growth. Using data for 91 countries, we isolate three empirical regularities: (1) governments that use fiscal policy aggressively induce significant macroeconomic instability; (2) the volatility of output caused by discretionary fiscal policy lowers economic growth by more than 0.8 percentage points for every percentage point increase in volatility; (3) prudent use of fiscal policy is explained to a large extent by the presence of political constraints and other political and institutional variables. The evidence in the paper supports arguments for constraining discretion by imposing institutional restrictions on governments as a way to reduce output volatility and increase the rate of economic growth.

Suggested Citation

  • Antonio Fatás & Ilian Mihov, 2003. "The Case for Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1419-1447.
    • Handle: RePEc:oup:qjecon:v:118:y:2003:i:4:p:1419-1447.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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