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The Case For Restricting Fiscal Policy Discretion

  • Antonio Fatás
  • Ilian Mihov

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. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 118 (2003)
Issue (Month): 4 (November)
Pages: 1419-1447

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Handle: RePEc:tpr:qjecon:v:118:y:2003:i:4:p:1419-1447
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  1. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
  2. Torsten Persson & Guido Tabellini, 2001. "Political Institutions and Policy Outcomes: What Are the Stylized Facts?," CESifo Working Paper Series 459, CESifo Group Munich.
  3. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
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  7. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
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  10. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
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  13. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
  14. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank.
  15. Torsten Persson, 2001. "Do Political Institutions Shape Economic Policy?," NBER Working Papers 8214, National Bureau of Economic Research, Inc.
  16. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
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  18. Boozer, Michael A., 1997. "Econometric Analysis of Panel Data Badi H. Baltagi Wiley, 1995," Econometric Theory, Cambridge University Press, vol. 13(05), pages 747-754, October.
  19. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
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