On Promoting Fiscal Discipline: The Role of Exchange Rate Regimes, Fiscal Rules and Institutions

Kady Synthia Keita and Camelia Romocea Turcu

No 8964, Policy Research Working Paper Series from The World Bank

Abstract: This paper examines how fiscal rules, exchange rate regimes, and institutional quality affect the cyclical behavior of fiscal policy (how government spending responds to fluctuations in gross domestic product). The analysis is performed on a panel of 153 advanced, emerging, and developing countries over 1993-2015 using local Gaussian-weighted ordinary least squares and two-stage least squares estimators. The findings show that the adoption of fiscal rules alone is not sufficient to promote countercyclical fiscal policy and should be combined with strong institutions. Moreover, fiscal rules seem to limit procyclicality, especially in countries with flexible exchange rate regimes rather than in countries with fixed exchange rates. The analysis also finds that the disciplining effect of fiscal rules depends on the type of rule.

Keywords: Macro-Fiscal Policy; Public Finance Decentralization and Poverty Reduction; Macroeconomics and Economic Growth; Economic Policy; Institutions and Governance; Economic Adjustment and Lending; Public Sector Economics; Fiscal&Monetary Policy; National Governance; Social Analysis; Government Policies; Quality of Life&Leisure; Youth and Governance; Macroeconomic Management; Public Financial Management (search for similar items in EconPapers)
Date: 2019-08-06
New Economics Papers: this item is included in nep-mac
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