Munich Personal RePEc Archive

Own or inherited? The effect of national fiscal rules after changes of government

Tóth, Csaba G. (2017): Own or inherited? The effect of national fiscal rules after changes of government. Forthcoming in:

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Abstract

In order to get to know more precisely the way national fiscal rules work, in our study we tried to differentiate the signaling function from the limiting one in regard to the operation of the rules. The former occurs when a government introduces fiscal rules to show its commitment to a disciplined fiscal policy, while the latter refers to the fact that rules constitute a true obstacle for budgetary policy. Through an empirical examination on our own database, we considered only the observations when the reigning government responsible for fiscal policy differed from the previous government responsible for its establishment; in this way we measured the effect of the limiting function the rules had. The results of our panel econometric study prove that fiscal rules can contribute to disciplined fiscal policy after a change in government, in times of economic upturn. All this, however, does not mean that the signaling function would be useless; quite the contrary. Our results, in line with the literature, indicate that the double functions of the rule complement one another. The government that introduces the rule is mostly already committed to a disciplined policy, and wishes to signal this in the short term. With the appearance of new governments, however, the rule changes its function and promotes disciplined economic activity efficiently in the long term.

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