The Credibility of Fiscal Rules Policy and Business Cycle Volatility

Kuncoro Haryo ()
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Kuncoro Haryo: Faculty of Economics, State University of Jakarta, Indonesia

Scientific Annals of Economics and Business, 2016, vol. 63, issue 2, 209-224

Abstract: The aim of this paper is two-fold; first, it studies the impact of the credibility of fiscal rule policy on the stability of output growth; second, it compares the effectiveness of fiscal rule policy to discretionary and automatic stabilizer fiscal policies to address the fluctuation of output growth. Employing quarterly data over the period 2001-2013 in the case of Indonesia, we obtain that the credible debt rule leads to a decrease in the volatility of output growth while the non-credible deficit rule does not have any effect. Both unsystematic and systematic components of discretionary fiscal policy have a stabilizing function. Interestingly, the automatic stabilization tends to induce the volatility of output growth. Given those results, we infer that government spending is not a good automatic stabilizer. It seems that the lower ratio of government expenditure to GDP along with improving credibility of deficit rule policy has a smoother effect on the economy. Therefore, they implicitly support expenditure cuts when implementing fiscal adjustment with the purpose of reaching fiscal sustainability in the short-run and a stable economic growth in the long-run.

Keywords: volatility of output growth; credible fiscal policy; government size; openness (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:aicuec:v:63:y:2016:i:2:p:209-224:n:6

DOI: 10.1515/saeb-2016-0117

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