The medium-term effects of fiscal policy rules

Christos Chrysanthakopoulos and Athanasios Tagkalakis

No 325, Working Papers from Bank of Greece

Abstract: Using a panel of 86 advanced and emerging market economies over the period 1985-2020, we investigate the short-to-medium term effects of fiscal policy rules on primary balances. We examine various types of rules (expenditure, revenue, debt, and budget balance rules) and various strict and flexible characteristics of fiscal rules. We find that the adoption of fiscal rules leads to a fiscal easing in the medium term, with the effects being more pronounced in emerging market versus advanced economies. We find an asymmetry in the workings of the fiscal rule over the business cycle. In times of expansion, the adoption of a rule leads to an a-cyclical or even procyclical response of the primary balance, while in times of recession fiscal rules induce a countercyclical impact response. Contrary to the baseline evidence, fiscal rules lead to a prudent fiscal policy response over the medium term when the debt ratio is high, the primary balance does not put the debt ratio on a declining path and the interest-growth rate differential is positive, as well as when the tax revenues generated by the tax system and tax administration are quite low relative to the stock of debt.

Keywords: Fiscal policy; fiscal rules; fiscal rules'characteristics; primary balance (search for similar items in EconPapers)
JEL-codes: E61 E62 (search for similar items in EconPapers)
Pages: 37
Date: 2024-01
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Citations: View citations in EconPapers (2)

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