Fiscal Rules Research Articles

Effectiveness of the stabilization fiscal rule for resource-rich countries

This paper explores the efficacy of the fiscal rule enacted by regulators in exporting countries, which implies the smoothing of tax revenue from the sale of natural resources. Under “efficacy” we understand its stabilization effect that is lowering volatility (countercyclicality) of key macroeconomic variables following its imposition. The approach to the operation of the fiscal rule is based on two types of assumptions: those about the type of the fiscal rule and about the structure of the economy. The first ones take into account imperfections in the workings of the revenue smoothing mechanism; the second relate to the duration of price and wage contracts, the cost of investing in foreign assets, government demand structures, household habits and the share of Ricardian households. We use a DSGE model of a small open economy with a strong reliance on commodity exports. The paper analyzes the assumptions under which various modifications of the fiscal rule lose their efficiency in relation to inflation, output and the exchange rate. The study emphasizes the importance of accurate identifying of fiscal rule workings, as well as the need for correct measurement of economic indicators in order to determine the nature of the fiscal rule effect related to revenue smoothing. The conclusion is made regarding the effectiveness of the future fiscal rule in Russia in the absence of an external wealth fund and a closed financial account.

Debt Level and Fiscal Rules in Iran According to Budget Structural Reform

Debt Level and Fiscal Rules in Iran According to Budget Structural Reform

The Impact of the COVID-19 Pandemic on Subnational Finance: Polish Experience

Abstract In the face of the COVID-19 pandemic, governments worldwide established various mechanisms to facilitate the pandemic response and ensure the state’s functioning. As a consequence, the economic impact of the COVID-19 crisis varies in countries, depending on the region. We are looking for answers to research questions: how the COVID-19 pandemic influenced the finances of local government institutions in 2020–2021; Is it possible to distinguish the types of units where this impact was greater or smaller, and whether and how the pandemic-related legislation influenced the fiscal relations between the state and local government, especially in the context of the local government institutions’ financial independence. We have noticed that financial solutions dedicated to local government units, as well as making local government fiscal rules more flexible, allowed to maintain the potential of the local economic base. They also had a diversified impact on the Polish local government institutions’ income level.

The European Union after the Crisis: Risks and Opportunities—The Problem of “Uncomfortable Knowledge” and “Institutionalised Forgetfulness”

The crisis caused by the war in Ukraine and the COVID-19 pandemic constitutes the most serious challenge for Europe since World War II. The crisis threatens Europe’s security and economy to an unprecedented level. No prediction on when and how the crisis will end is possible. However, irrespective of its end, there is no doubt that for Europe, it will generate costs amounting to several hundreds of billions if not even some trillions of Euros, i.e. seriously harm and weaken the European economy and endanger Europe’s position as a global economic power. It will also result in fundamental changes of international economic and political relations. Searching for, working on and designing rational and effective solutions to successfully master the aftermath of the crisis politically and economically should have a priority for the European Union, coming next only to the incredibly challenging efforts to master the ongoing crisis. The COVID-19 pandemic as well as the war in Ukraine caught the EU by surprise and unprepared. Europe should avoid such an experience in the future. Regardless of how this crisis will end, mastering its aftermath and identifying the respective risks and opportunities of the EU will have to start with identifying the main beneficiary(ies) of the crisis and analysing its (their) treatment of the EU and its Member States before and during the crisis. This will not be possible by limiting the actions to the day-to-day business, such as finding new suppliers for raw materials and energy, harmonising fiscal rules, providing the necessary funds to master the financial crisis, etc. A much broader visionary approach will be necessary to find solutions for sustainable peace in Europe. An outcome such as that of the Treaty of Versailles should be avoided. One should prevent the “sleepwalkers” of today, i.e. those ignoring the “uncomfortable knowledge”, letting Europe slide into World War III. The EU should make it clear to all of its Members, for Europe, the “European Solidarity’, with all of its attributes, constitutes the core of the EU’s genuine interests, including those of security and defence. This will require also amendments of the TEU and TFEU discussed in this paper. Otherwise, the EU and its Members will never acquire the status of an equal animal—in the global context—i.e. become truly sovereign and independent.

Evaluating Fiscal Rules for Lesotho

Evaluating Fiscal Rules for Lesotho

Uninformed voters with (im)precise expectations: Explaining political budget cycle puzzles

AbstractGovernments try to improve re‐election chances by using fiscal instruments; they can shift voters' expectations of government competence because some voters are impaired by uninformedness. We argue that uninformed voters may also be impaired in another way which has not been considered in the literature, namely that uninformed voters are uncertain about the precision of that expected competence. Analytically, we show that political budget cycles (PBCs) are only produced when we have many uninformed voters and their expected competence of the government is fairly uncertain; or with few uninformed voters and certain expectations. This could explain two empirical puzzles on why we sometimes find and sometimes not (i) PBCs in developed and democratic countries with strong institutions, and (ii) that press freedom exacerbates PBCs. In a panel of 70 countries (1986–2015) we find empirical support for these findings. Results are robust to alternative specifications and explanations like fiscal rules, corruption and expected downturns.

How Fiscal Rules Matter for Successful Fiscal Consolidations: New Evidence

Abstract Fiscal rules are increasingly promoted by international organizations. We investigate whether fiscal rules are effective in achieving sustained debt reduction during periods of fiscal consolidation using data from 19 OECD countries. The analysis is based on an extended version of the International Monetary Fund’s fiscal rules database. Fiscal consolidation periods are identified using a novel method that takes differences in the variability of fiscal balances into account. We find: (i) the EU’s Stability and Growth Pact is associated with sustained debt reduction while it is more doubtful if the mere existence of national fiscal rules has an effect. (ii) Fiscal rules have a stronger association with sustained debt reduction when they are embedded in a stricter national institutional framework (JEL codes: H6).

A Green Fiscal Pact for the EU: increasing climate investments while consolidating budgets

ABSTRACT To ensure sufficiently rapid decarbonization to meet the Paris Agreement goals, investments in green infrastructure will have to increase by an estimated 2% of world GDP annually, according to the International Energy Agency. A significant part of that investment will need to be funded with public resources – raising major tensions between consolidation needs after the high deficits during the pandemic and the need to increase investments. We consider this trade-off in the European Union, which has set itself one of the most ambitious climate targets in the world. The additional public investment required to meet the European Union’s climate goals is around 0.6% of GDP annually during this decade, which might increase if the green transition is accelerated due to Russia’s invasion of Ukraine. Budget consolidation can be done at a moderate pace in line with EU fiscal rules if those rules are interpreted flexibly, but past consolidation episodes resulted in major public investment cuts. A ‘green golden rule’ –excluding net green investment from the fiscal indicators used to measure fiscal rule compliance– is proposed as the most promising option to address this tension and would provide a positive incentive to undertake such investments. However, the uncertain growth impact of green public spending and the risks to growth from climate change create difficult trade-offs in fiscally weaker countries. Better regulatory policy and a higher price on emissions should in parallel incentivise private green investment and reduce public costs. These ingredients should be combined to form a ‘Green Fiscal Pact’. Key policy insights Public investments tend to be cut in fiscal consolidation episodes by vote-maximising politicians and thus need to be treated differently in fiscal rules. Increasing green public investments will be difficult in the upcoming consolidation period. A ‘green golden rule’ –excluding net green public investment from the fiscal rule indicators– is proposed as the best option to incentivise public climate investment. Policymakers need to underpin such a rule by clearly defining what constitutes emission-reducing climate investments and monitoring compliance. Fossil fuel subsidies should also be eliminated, and private climate investment should be incentivised through appropriate taxation and regulation. Climate change may tighten budget constraints in countries with already high debt levels because of its negative growth effects, so these countries should delay the introduction of the green golden rule.

Promoting Counter-Cyclical Fiscal Policy: Fiscal Rules Versus Institutions

We explore under different exchange rate regimes how fiscal rules and institutions can reduce the procyclical stance of fiscal policy (i.e. how government spending responds to GDP fluctuations). We construct a fiscal rules index which is a composite index measuring the overall strength of fiscal rules in a country at a given time. We use it in a dynamic model with a GMM estimator, for a panel of 153 countries over the period 1993-2015. We find that under fixed exchange rate regimes, while better institutions can reduce procyclicality, rules increase it or do not affect it. This result suggests that under fixed exchange rate regimes, a focus should be put on stronger institutional quality rather than on the adoption of fiscal rules. However, under flexible exchange rate regimes, we find that institutions and rules are complementary in reducing procyclicality. Rules help reduce procyclicality and are more effective, in particular, when institutions are stronger. Our results are robust to different specifications as well as to the use of alternative variables of institutional quality.

Better Fiscal Rules for a More Integrated EMU

The COVID-19 pandemic and the pressure it has created on member states’ public finances have led European authorities to suspend the EU’s fiscal rules. In fact, these rules had long been criticised by academics and had only been abided by exceptionally. Beyond the rules themselves, the lessons one can draw from the past 20 years also give good reason to revise the EU overall coordination framework.

The impact of economic sanctions and the Covis-19 pandemic on the efficiency of the Russian foreign exchange market

The article analyzes the effectiveness of the Russian currency market using the multi-fractal analysis of fluctuations without a trend (MF-DFA) of a time series composed of daily values of the US dollar (USD) to Russian ruble (RUB) (USD/RUB) exchange rate for the period time (01/01/2013 — 04/01/2022), during which events occurred that led to serious changes in the Russian foreign exchange market.
 Calculations showed that the time series made up of the daily values of the USD/RUB exchange rate showed the least efficiency after the introduction of the fiscal rule and the coronavirus pandemic, and the highest comparative efficiency after the introduction of the freely floating exchange rate regime.

How do fiscal rules shape governments' spending behavior?

AbstractAt odds with the large literature devoted to the fiscal discipline effects of fiscal rules, only few contributions investigate their impact on public spending. Estimations based on the entropy balancing method reveal the following causal effects: fiscal rules significantly reduce total public spending and public consumption, leave public investment mostly unaffected, and increase the public investment‐to‐public consumption ratio. Moreover, the type of fiscal rule and countries' level of economic development influence the way fiscal rules affect public spending. Lastly, fiscal rules' features are a major driving force of the way governments change public spending in the presence of fiscal rules.

Sovereign bail‐outs and fiscal rules in a banking union*

AbstractIn this paper, we study optimal fiscal rules in a two‐country economy in which cross‐country linkages between sovereign debts and banking sectors motivate bail‐outs among countries. The first‐best sovereign borrowing, which is contingent on the output gap between the countries, cannot be achieved in the presence of asymmetric information on a country's potential output. Because bail‐out induces overborrowing, fiscal rules can be implemented to prevent the ensuing inefficiency. A mechanism can be designed to induce a country with low potential output (i.e., a small negative output gap) to run an optimal budget deficit upon receiving a transfer (ex post) from the other country. We characterize conditions under which this fiscal mechanism Pareto dominates a “cyclically adjusted” fiscal rule imposing a unique ceiling on a country's borrowing, independently of its potential output. We apply our setting to a discussion of the implications for fiscal rules within the European Monetary Union.

Fiscal Rules and the Sovereign Default Premium

We study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the optimal debt or spread brake. However, for a “Union” of heterogeneous economies, a common spread brake generates larger gains than a common debt brake. Furthermore, gains from abandoning a common debt brake may be significant for economies that are unnecessarily constrained by the rule. In contrast, abandoning a common spread brake would generate losses for any economy in the Union. (JEL E62, F34, F41, H61, H63)

재정준칙과 정부 부패

A fiscal rule is a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. Several empirical studies have shown that countries with fiscal rules tend to have better fiscal outcomes. This paper estimates the causal effect of fiscal rules on government corruption in a panel of 36 OECD countries over the period 1994-2015. This paper finds that Expenditure Rules, Debt Rules correlate with lower government corruption. However, Budget Balance Rules with higher government corruption. This paper contributes to the empirical literature on the effectiveness of fiscal rules by developing a new instrumental variables strategy. Above all, an independent financial institutions have a positive effect on the adoption of fiscal rules. This study suggest that independent financial institutions can enhance the adoption of fiscal rules and government transparency.

СТРАТЕГІЧНІ ЗАСАДИ УПРАВЛІННЯ ДЕРЖАВНИМ БОРГОМ

Розв’язана РФ війна проти України призвела до різкого загострення ризиків мобілізації доходів і зростання витрат. Виявилася необхідність залучення значних обсягів додаткового ресурсу, зокрема, шляхом розширення запозичень. Значного зростання боргового фінансування не передбачалося середньостроковими планами, що ускладнює прийняття управлінських рішень під час війни. Водночас боргове фінансування з внутрішніх джерел здійснюється за недостатньої активності приватних інвесторів. Наслідком стало посилення тенденції до зростання частки ОВДП у власності НБУ і банків, що спричинило загострення ризиків фінансової стабільності. Виявилася необхідність внесення суттєвих змін до управління державними борговими зобов’язаннями, передусім, оновлення стратегічних підходів, які б передбачали вирішення не лише поточних проблем, а й у довго- і середньостроковій перспективі. Для цього необхідно визначити засади стратегії управління державним боргом не тільки в період війни, а й у післявоєнний час, обґрунтувати пропозиції таі рекомендації щодо внесення змін до її забезпечення. Нова Стратегія управління державним боргом має спрямовуватись як на фінансування заходів протидії російській агресії, так і на стабілізацію економіки в післявоєнний період і відновлення поступального розвитку країни. Для цього запропоновано передбачити декілька етапів вирішення таких завдань: 1) розширення боргової експансії, 2) забезпечення стабілізації державних фінансів, 3) повернення до використання фіскальних правил, переорієнтація на підтримку економічного зростання і фінансування заходів в умовах надзвичайних ситуацій. При розробленні Стратегії слід уточнити зміст державного боргу, мету управління борговими зобов’язаннями, його цілі й завдання. Передбачено доповнити її розробкою державного боргового портфеля (що відображатиме комбінацію боргових інструментів з урахуванням ризиків їх упровадження), внести зміни в механізми мобілізації ресурсів, погашення й обслуговування позик, провести їх реструктуризацію і рефінансування.

Institutionalizing the autocratic penalty away: fiscal rules, autocracy, and sovereign financial market access

AbstractThe “democratic advantage” in access to credit markets has been vigorously researched. Recent research has found that this “autocratic disadvantage” can be partly countered by other factors. However, this research agenda has largely ignored an increasingly important type of institution of direct importance for national fiscal policy, fiscal rules. This article argues that fiscal rules alleviate the “autocratic disadvantage” in sovereign bond market access. This argument is tested on a dataset on fiscal rules and sovereign bond issuing data covering 121 countries from 1990 to 2015. The results provide substantial evidence in favor of the argument, autocracies with fiscal rules face no disadvantage in bond market access and might even be more likely to issue new government bonds than democracies.

EU fiscal governance and the managerial reformatting of neoliberal constitutionalism

This article analyses the EU’s Stability and Growth Pact (SGP) to challenge interpretations of neoliberalism as an international project. The fiscal rules of the SGP are a paradigmatic example of how neoliberalism uses constitutional techniques to put limits on national democracy. These rules, however, have never worked as intended with adherence having been the exception rather than the norm. Although scholars readily admit neoliberal rules misfire in practice, conceptualisations of neoliberalism have remained largely unscathed. In contrast, this article argues that techniques of budgetary planning have had a more crucial impact on neoliberal fiscal governance than legal rules. In the case of the SGP, supranational actors have been empowered not by their capacity to put constitutional limits on public expenditure, but by analysing and intervening in the purposes and uses of public finance through managerial techniques of budgetary planning. In making this argument, I argue that neoliberal rules matter to international fiscal governance only through their failure. Instead, supranational institutions have been empowered in the neoliberal era through a managerial reformatting of governance.

Monetary and fiscal policy in a nonlinear model of public debt

In this paper we study the dynamic relationship between the public debt ratio and the real interest rate. Specifically, by means of a macroeconomic model of simultaneous difference equations – one for the debt ratio and the other for the real interest rate – we focus on the role of monetary policy, fiscal policy and risk premium in affecting the stability of the debt ratio and the existence of steady states, if any. We show that, in a dynamic framework, fiscal rules may not be enough to control the pattern of the debt ratio, and the adoption of a monetary policy, in the form of an interest rate rule, is necessary to control the pattern of the debt ratio for assuring its sustainability over time. Notably, the creation or disappearance of steady states, or periodic (stable) cycles, can generate scenarios of multistability. While we obtain clear evidence that an active monetary policy has a stabilizing effect on both the real interest rate and the debt ratio, we also find that, in some scenarios, fiscal policy is not sufficient to avoid explosive patterns of the debt ratio.

On fiscal rules, gross domestic product forecasts and prediction of economic crises: a reply to ‘Macroeconomic equilibriums, crises and fiscal policy’ by Fredrik N.G. Andersson

On fiscal rules, gross domestic product forecasts and prediction of economic crises: a reply to ‘Macroeconomic equilibriums, crises and fiscal policy’ by Fredrik N.G. Andersson