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Fiscal Rules and Composition Bias in OECD Countries

  • Momi Dahan
  • Michel Strawczynski

Using a sample of OECD countries, this paper finds that while fiscal rules succeeded in reducing total government expenditures and budget deficits in the medium term, they significantly affected the composition of government expenditure: the ratio of social transfers to government consumption declined. In contrast, we do not find a stable effect of fiscal rules on public investment. It is shown that the compositional shift against social transfers is beyond “from welfare to work” policies, which have been adopted by many OECD countries during the nineties. Our empirical examination reveals that the reduction of social transfers relative to government consumption did not occur in countries with strong legal protection to social rights.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-06/cesifo1_wp3088.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3088.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3088
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  1. H. Badinger, 2009. "Fiscal rules, discretionary fiscal policy and macroeconomic stability: an empirical assessment for OECD countries," Applied Economics, Taylor & Francis Journals, vol. 41(7), pages 829-847.
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  7. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
  8. John P Martin, 1998. "What Works Among Active Labour Market Policies: Evidence from OECD Countries' Experiences," RBA Annual Conference Volume, in: Guy Debelle & Jeff Borland (ed.), Unemployment and the Australian Labour Market Reserve Bank of Australia.
  9. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
  10. Signe Krogstrup & Sébastien Wälti, 2007. "Do fiscal rules cause budgetary outcomes?," IHEID Working Papers 15-2007, Economics Section, The Graduate Institute of International Studies, revised May 2007.
  11. Martin, John P. & Grubb, David, 2001. "What works and for whom: a review of OECD countries' experiences with active labour market policies," Working Paper Series 2001:14, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  12. John Creedy & Solmaz Moslehi, 2007. "Modelling the Composition of Government Expenditure in Democracies," Department of Economics - Working Papers Series 1007, The University of Melbourne.
  13. Ismael Sanz & Francisco J. Velázquez, 2003. "Fiscal illusion, fiscal consolidation and government expenditure composition in the OECD: a dynamic panel data approach," European Economy Group Working Papers 21, European Economy Group.
  14. Alberto Alesina & Tamim Bayoumi, 1996. "The Costs and Benefits of Fiscal Rules: Evidence from U.S. States," NBER Working Papers 5614, National Bureau of Economic Research, Inc.
  15. Ben-Bassat, Avi & Dahan, Momi, 2008. "Social rights in the constitution and in practice," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 103-119, March.
  16. George Kopits, 2001. "Fiscal Rules; Useful Policy Framework or Unnecessary Ornament?," IMF Working Papers 01/145, International Monetary Fund.
  17. Alan J. Auerbach, 2008. "Federal Budget Rules: The US Experience," NBER Working Papers 14288, National Bureau of Economic Research, Inc.
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