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:

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal policy; fiscal rules; fiscal discipline, political economy
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General

References

Afonso, A., & Hauptmeier, S. (2009). Fiscal behavior in the European Union: rules, fiscal decentralization and government indebtedness. ECB Working Paper No. 1054.

Alesina, A., Campante, F. R., & Tabellini, G. (2008). Why is fiscal policy often procyclical? Journal of the European Economic Association, 6(5), 1006–1036.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment balances. The Review of Economic Studies, 58(2), 277–297.

Ayuso-i-Casals, J., Hernández, D. G., Moulin, L., & Turrini, A. (2009). Beyond the SGP: Features and effects of EU national-level fiscal rules. In Policy instruments for sound fiscal policies (pp. 204–240). Palgrave Macmillan UK.

Balatoni, A. (2015). A simple fiscal rule for Hungary. Acta Oeconomica, 65(1), 149–159.

Balázsi, L., Divényi, J., Kézdi, G., & Mátyás, L. (2014). A közgazdasági adatforradalom és a panelökonometria. Közgazdasági Szemle, 61(11), 1319–1340.

Bayoumi, T., Goldstein, M., & Woglom, G. (1995). Do credit markets discipline sovereign borrowers? Evidence from US states. Journal of Money, Credit and Banking, [volume(issue), 1046–1059.

Beetsma, R., & Gradus, R. (2012). A discussion of the changes to Europe's macro-fiscal framework in response to the crisis. CESifo Forum. 13(1). Institut für Wirtschaftsforschung (Ifo).

Benczes, I. (2011). Nemzeti szintű fiskális szabályok használata az Európai Unióban. Külgazdaság, 55(4-3), 55–75.

Benecki, R., Hölscher, J., & Jarmuzek, M. (2009). Fiscal transparency and policy rules in Poland. CASE Network Studies and Analysis 327. London.

Bergman, U. M., Hutchison, M. M., & Jensen, S. E. H. (2013). Do sound public finances require fiscal rules or is market pressure enough? European Commission, European Economy. Economic Papers No. 489 (April).

Bergman, U. M., Hutchison, M. M., & Jensen, S. E. H. (2014). Phoenix rising from the ashes: New evidence on national fiscal rules in the EU. Conference paper. Swedish Network for European Studies in Economics and Business (SNEE) on European Integration, Mölle, Sweden.

Bergman, U. M., Hutchison, M. M., & Jensen, S. E. H. (2016). Promoting sustainable public finances in the European Union: The role of fiscal rules and government efficiency. European Journal of Political Economy 44, 1–19.

Berndsen, R. (2001). Postwar fiscal rules in the Netherlands: What can we learn for EMU? Proceedings of the Banca d’Italia Public Finance Workshop 2001, 367-380.

Bohn, H. (1998). The behavior of U.S. public debt and deficits. The Quarterly Journal of Economics, 113(3), 949–963.

Bova, E., Carcenac, N., & Guerguil, M. (2014). Fiscal rules and the procyclicality of fiscal policy in the developing world. IMF Working Paper, WP/14/122.

Brender, A., & Drazen, A. (2005). Political budget cycles in new versus established democracies. Journal of monetary Economics, 52(7), 1271–1295.

Checherita-Westphal, C., & Ždarek V. (2015). Fiscal reaction function and fiscal fatigue in the euro area. In Public Finance Workshop, Hrvatska narodna banka, Zagreb

Christoffel, K., Jaccard, I., & Kilponen, J. (2010). Bond risk premium, fiscal rules and monetary policy: An estimated DGSE approach. European Central Bank.

Cordes, T., Kinda, T., Muthoora, P., & Anke W. (2015). Expenditure rules: Effective tools for sound fiscal policy? IMF Working Paper 15/29.

Cottarelli, C., Gerson, P., & Senhadji, A. (2014). Post-crisis fiscal policy. Cambridge, MA: MIT Press.

Dahan, M., & Strawczynski, M. (2010). Fiscal rules and composition bias in OECD countries. CESIFO Working Paper No. 3088.

Darvas Zs., & Kostyleva, V. (2011). The fiscal and monetary institutions of CE-SEE countries. Bruegel Working Paper, No. 2.

Debrun, X., & Kumar, M. (2007). Fiscal rules, fiscal councils and all that: Commitment devices, signaling tools or smokescreens? Proceedings of the 9th Banca d’Italia Workshop on Public Finance. Rome: Banca d’Italia.

Debrun, X., Moulin, L., Turrini, A., Ayuso-i-Casals, J., & Kumar, S. M. (2008). Tied to the mast? National fiscal rules in the European Union. Economic Policy, 23(54), 298–362.

Deroose, S., Schaechter, A., & Larch, M. (2008). Constricted, lame and pro-cyclical? Fiscal policy in the euro area revisited. Economic papers No. 353. European Commission, DG ECFIN.

Dupont, J., & Kwarteng, K. (2012). Binding the hands of government: A credible fiscal rule for the UK. IEA Current Controversies Paper 36, May. London

European Commission (2006). Numerical fiscal rules in the EU member states. In Public finances in EMU. European Economy No. 3, Part III, chapter 3, pp. 149–168. European Commission.

European Commission (2009). Numerical fiscal rules in the EU member states in 2008. In Public finances in EMU. Part II, chapter 4, [pages]. European Commission.

European Commission (2015). Fiscal Rules database (old methodology). http://ec.europa.eu/economy_finance/db_indicators/fiscal_governance/fiscal_rules/index_en.htm. Download date: 01.09.2015

Győrffy, D. (2012). Intézményi bizalom és a döntések időhorizontja. Közgazdasági Szemle 59(4), 412–425.

Hallerberg, M., & Von Hagen, J. (2006). Budget processes in Poland: Promoting fiscal and economic stability. Warsaw: Ernst and Young Better Government Program.

Heinemann, F., & Yeter, M. (2014). The effects of fiscal rules on public finances and their identification. Conference Paper. Evidenzbasierte Wirtschaftspolitik - Session: Fiscal Sustainability, No. B20-V1,

Heinemann, F., Osterloh, S., & Kalb, A. (2014). Sovereign risk premia: The link between fiscal rules and stability culture. ZEW Discussion Papers 13-016. ZEW - Zentrum für Europäische Wirtschaftsforschung/Center for European Economic Research.

Heinemann, F., Moessinger, M., & Daniel-Yeter, M. (2016). Do fiscal rules constrain fiscal policy? A meta-regression-analysis. ZEW Discussion Paper No. 16-027.

Hemming, R., & Kell, M. (2001). Promoting fiscal responsibility: transparency, rules and independent fiscal authorities.

Holm-Hadulla, F., Hauptmeier, S., & Rother, P. (2012). The impact of expenditure rules on budgetary discipline over the cycle. Applied Economics 44(25), 3287–3296.

Hong, S. (2015). Fiscal rules in recessions: Evidence from the American states. Public Finance Review 43(4), 505–528.

Iara, A., & Wolff, G. B. (2010). Rules and risk in the euro area: does rules-based national fiscal governance contain sovereign bond spreads? European Economy - Economic Papers 433, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission,

Kennedy, S., & Robbins, J. (2001). The role of fiscal rules in determining fiscal performance. Department of Finance Canada, Working Paper, No. 16.

Kopits, Gy. (2001). Fiscal rules: Useful policy framework or unnecessary ornament. IMF Working Paper, No. 145.

Krogstrup, S., & Wälti, S. (2008). Do fiscal rules cause budgetary outcomes? Public Choice 136(1-2), 123–138.

Kumar, M. S., & Ter-Minassian, T. (2007): Promoting fiscal discipline. International Monetary Fund.

Marneffe, W., Van Aarle, B., Van Der Wielen, W., & Vereeck, L. (2010). The impact of fiscal rules on public finances: Theory and empirical evidence for the euro area. CESifo Working Paper Series No. 3303.

Mellár, T. (2016). Szolgálólányból királycsináló – avagy az ökonometria mak-roökonómiai térhódítása? Közgazdasági Szemle, 63(3), 285–306.

Musgrave, R. A. (1959). The theory of public finance. New York: McGraw-Hill.

Nerlich, C., & Reuter, W. H. (2013). The design of national fiscal frame-works and their budgetary impact. ECB Working Paper 1588.

Nickell, S. (1981). Biases in dynamic models with fixed effects. Econometrica, 49(6), 1417–1426.

P. Kiss, G. (2012). Distinkció és kikényszeríthetőség – a fiskális szabályrendszer alfája és ómegája. Pázmány Law Working Papers, No. 39.

Poterba, J. M. (1996). Do budget rules work? NBER Working Paper No. 5550.

Reuter, W. H. (2015). National numerical fiscal rules: Not complied with, but still effective? European Journal of Political Economy, 39, 67–81.

Romer, C. (2012). Fiscal policy in the crisis: Lessons and policy implications. IMF Fiscal Forum, 18.

Sacchi, A., & Salotti, S. (2015). The impact of national fiscal rules on the stabilization function of fiscal policy. European Journal of Political Economy 37, 1–20.

Szczypińska, A. (2014). Does the halo effect still hold? The (post-) crisis perspective for 4the euro candidates. IMF Working Paper Series,.

Thornton, J., & Vasilakis, C. (2017). The impact of fiscal rules on sovereign risk premia: International evidence. Finance Research Letters, 20, 63–67.

Tóth, G. Cs. (2010). Boosting demand by the state and automatic stabilizers. Public Finance Quarterly, 55(1), 51–70.

Wyplosz, C. (2012). Fiscal rules: Theoretical issues and historical experiences. Working paper 17884 NBER