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The effects of fiscal rules on public investment over the cycle

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  • Ekaterina Juergens

Abstract

This paper investigates how numerical fiscal rules affect government investment in the EU and disentangles their effect over the business cycle. Public investment seems to be generally susceptible to cutbacks during recessions. Fiscal rules demonstrate heterogeneous effects, depending on their design and on the state of the economy. Specifically, rigid fiscal rules, lacking flexibility features, restrain government investment. This detrimental effect mostly materializes during a downturn, thus exacerbating the overall negative impact of the recession. Key public investment categories, such as Economic Affairs, Housing, Health, and Social Protection, shrink during recessions when fiscal rules are implemented. It is important to design fiscal rules with enough flexibility to reduce their procyclical effect and prevent them from curtailing investment in vital areas of public economy.

Suggested Citation

  • Ekaterina Juergens, 2022. "The effects of fiscal rules on public investment over the cycle," FMM Working Paper 84-2022, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:fmmpap:84-2022
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    File URL: http://www.boeckler.de/pdf/p_fmm_imk_wp_84_2022.pdf
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    More about this item

    Keywords

    Fiscal rules; public investment; fiscal cyclicality; EMU;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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