The impact of national fiscal rules on the stabilisation function of fiscal policy

Agnese Sacchi and Simone Salotti

MPRA Paper from University Library of Munich, Germany

Abstract: We study the relationship between discretionary fiscal policy and macroeconomic stability in 21 OECD countries over the 1985-2012 period. The novelties of our contribution lie in the use of annual panel data, whereas most of the existing evidence is cross-sectional, and more importantly in the thorough investigation of how fiscal rules affect the policy-macroeconomic stability relationship. We find that the aggressive use of discretionary fiscal policy, particularly of government consumption items, leads to higher volatility of both output and inflation. However, when strict fiscal rules are introduced, discretionary policy becomes output-stabilising rather than destabilising. This result can be more easily achieved by rules on balanced budgets, rather than on expenditures, revenues, or debt. On the other hand, fiscal rules are unable to affect the inflation-destabilising nature of discretionary policy, probably because of the higher importance of central banks in that respect.

Keywords: discretionary fiscal policy; macroeconomic volatility; fiscal rules; stabilisation function (search for similar items in EconPapers)
JEL-codes: E32 E62 H60 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The impact of national fiscal rules on the stabilisation function of fiscal policy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:56982

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