Abstract
Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.
Highlights
Empirical evidence suggests that there are several advantages of implementing formal fiscal rules with sufficient commitment. Garcia et al (2011) argue that adopting a fiscal rule results in fiscal discipline as opportunistic political views together with a fragile institutional framework exert bias towards increasing deficits, otherwise
2.1 Tax difference rule reacting to debt
2.2 Tax difference rule reacting to deficit
Summary
Empirical evidence suggests that there are several advantages of implementing formal fiscal rules with sufficient commitment. Garcia et al (2011) argue that adopting a fiscal rule results in fiscal discipline as opportunistic political views together with a fragile institutional framework exert bias towards increasing deficits, otherwise. Following a fiscal rule delivers favourable results. It increases credibility of the fiscal authority since a fiscal rule with a genuine commitment to implement will raise the confidence of the market participants. This avoids the time inconsistency problem and keeps market expectations stable. It induces stability due to lowered volatility. It is, observed that in many countries fiscal policy is procyclical and this leads to amplify macroeconomic volatility. Countercyclical fiscal rules can be designed to attenuate such volatility and stabilise the economy (Kopits and Symansky, 1998; Garcia et al, 2011)
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