Abstract
Fiscal rules are institutional approaches aimed at maintaining fiscal credibility and fiscal discipline and usually set a numerical indicator. Currently, there are two sources of fiscal rules. One is the International Monetary Fund (IMF) dataset that provides country-specific details on various characteristics of rules for 96 countries and the other is European Commission – numerical fiscal rules index that provides the fiscal rule index for 28 member countries. Because of the lack of fiscal rule index for the Asia-Pacific countries, the purpose of this study is to construct the fiscal rule index for 8 Asia-Pacific countries from 1996 to 2015 by using the IMF dataset. Then, this study utilizes the Panel Generalized Method of Moments and the constructed fiscal rule index to investigate the impact of fiscal rules and government effectiveness on the procyclicality of fiscal policy in 8 Asia-Pacific countries, classified as “advanced economies” and “emerging economies”. The empirical results show that fiscal rules and government effectiveness are effective in reducing the procyclicality of government expenditure only in advanced economies. Additionally, the interaction of fiscal rules and government effectiveness has a negative impact on the procyclicality of government expenditure for both advanced economies and emerging economies but the effect is not significant in emerging economies.
Highlights
Fiscal rules have become more common in recent years
We focus on four types of fiscal rules which are expenditure rule, revenue rule, budget balance rule, and debt rule
This study considers the interaction between fiscal rules and government effectiveness, using the government effectiveness index of Worldwide Governance Indicators (WGI) from the World Bank
Summary
According to the International Monetary Fund (IMF) definition, fiscal rules are defined as long-lasting restrictions on fiscal policy through numerical limits on the total amount of the budget. Fiscal rules usually set a numerical indicator that can be sustained over a long period (usually a certain percentage of gross domestic product (GDP) and focus on fiscal indicators such as government budget deficits, net borrowings, and total government debt. The most common types of fiscal rules are the balanced budget rule and debt rule. The Maastricht Treaty and the Stability and Growth Pact are fiscal frameworks based on fiscal rules, requiring member countries to be under certain fiscal rules and develop their budget policies. After the financial crisis in 2009, countries began to implement fiscal rules reforms to form the “second-generation fiscal rules”
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