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Fiscal rules, inertia and discretionary fiscal policy

  • Martin Larch
  • Matteo Salto

In current practice, changes in the cyclically-adjusted budget balance (CAB) are generally interpreted as reflecting the effort of discretionary fiscal policy. This paper shows that such an interpretation is not a sufficiently accurate description of the behaviour of fiscal policy, and, in some cases, it may even conceal an important deficit bias. Specifically, as growth projections are an important building block of budgetary plans, optimism in forecasting growth, coupled with pervasive lags and inertia in the implementation phase of the budget, will result in a fiscal expansion, even in the absence of discretionary measures.

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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers 2008 - 2015 with number 194.

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Length: 21 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:euf:ecopap:0194
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