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The effectiveness of cyclically adjusted budget rules in the European Union

Sebastiaan Wijsman

No 634709, Working Papers of Department of Management, Strategy and Innovation, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven

Abstract: This paper presents a game-theoretical model on how revisions of the structural balance affect the implementation of the fiscal rules in the European Union (EU). The structural balance filters the nominal budget balance for influences of the economic cycle and is therefore expected to be a better indicator for fiscal discipline. However, its derivation requires assumptions and estimates on the cyclical influences and the structural balance is as a consequence revised frequently outside the governments’ control. This paper assesses how this affects the effectiveness of fiscal rules. We find that the lack of control over their compliance discourages governments to set compliant budgets. Furthermore, we find that enforcers ignore the structural balance’s value in their assessment of governments’ fiscal discipline. They are uncertain whether noncompliance is due to governments’ decisions or bad luck. As a result, undisciplined governments might be left unsanctioned, while sanctions might be imposed on disciplined governments. We assess our theoretical findings empirically using the European Commission’s national fiscal rules database. However, we do not find evidence that cyclically adjusted budget rules are less effective.

Keywords: Structural balance; Stability and Growth Pact; Fiscal rules (search for similar items in EconPapers)
Pages: 48
Date: 2019-02-28
New Economics Papers: this item is included in nep-acc, nep-eec and nep-mac
Note: paper number MSI_1902
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Published in FEB Research Report MSI_1902

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Persistent link: https://EconPapers.repec.org/RePEc:ete:msiper:634709

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