Economic stabilization in the post-crisis world: Are fiscal rules the answer?

Research output: Contribution to journalJournal articleResearchpeer-review

Ulf Michael Bergman, Michael M. Hutchison

We investigate whether fiscal rules help to reduce the extent of policy procyclicalitydhow government expenditure policy responds to GDP – in a dynamic panel framework with 81 advanced, emerging and developing countries over 1985-2012. We construct two new fiscal rule indices and investigate whether rules help to dampen procyclical policies. We condition our empirical specifications on the degree to which governments appear able to manage and enforce fiscal rules. We find that fiscal rules are very effective in reducing procyclicality of policy once a minimum threshold of government efficiency/quality has been reached. Government efficiency alone is not enough to reduce procyclicality of fiscal policy. However, high government efficiency combined with strong fiscal rules is a potent combination facilitating counter-cyclical policy responses to GDP movements.
Original languageEnglish
JournalJournal of International Money and Finance
Volume52
Pages (from-to)82-101
Number of pages20
ISSN0261-5606
DOIs
Publication statusPublished - 2015

Bibliographical note

JEL Classification: E32, E62, H5

ID: 129921033