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Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World

Elva Bova, Nathalie Carcenac and Martine Guerguil

No 2014/122, IMF Working Papers from International Monetary Fund

Abstract: This paper documents the spread of fiscal rules in the developing world and investigates the relation between fiscal rules and procyclical fiscal policy. We find that, since the early 2000s, developing countries outnumbered advanced economies as users of fiscal rules. Rules were adopted either as part of the toolkit to join currency unions or to strengthen fiscal frameworks during and after large stabilization and policy reform episodes. The paper also finds that the greater use of fiscal rules has not shielded these countries from procyclicality, since fiscal policy remains procyclical following the adoption of a fiscal rule. We find partial evidence that some features of “second generation” rules, such as the use of cyclically-adjusted targets, well-defined escape clauses, together with stronger legal and enforcement arrangements, may be associated with less procyclicality.

Keywords: WP; EMDEs; economy; IMF Fiscal Rules Database; countercyclical fiscal policies; number of emerging market and developing economies; Fiscal rules; fiscal policty; cyclicality; emerging markets; developing economies; fiscal rule; IMF staff estimate; expenditure rule; budget balance rule combination; debt rule; EMDE rule; Procyclicality; Fiscal stance; Middle East; Europe; Asia and Pacific (search for similar items in EconPapers)
Pages: 27
Date: 2014-07-10
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Handle: RePEc:imf:imfwpa:2014/122