## _wp14122

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---

### Introduction
- Purpose: Document the spread and impact of fiscal rules in the developing world and explore the relation between fiscal rules and procyclical fiscal policy in EMDEs.
- Approach: Use simple methodologies and correlations to explore associations (not causality) between the presence/features of fiscal rules and measures of spending procyclicality, acknowledging limits from reverse causality, unobservable factors, and short time series.

### Fiscal Rules in EMDEs
- Adoption and scope:
  - Since the early 2000s, EMDEs outnumber advanced economies as users of fiscal rules: 47 of them had a fiscal rule in place in 2012, compared with 28 advanced economies.
  - As of end 2012, out of a total of 76 countries with one or more fiscal rules in place, 28 were advanced economies and 48 EMDEs.
- Database inclusion/exclusion rules:
  - Includes rules with specific numerical targets fixed in legislation and arrangements where targets can be revised but are binding for a minimum of three years.
  - Excludes medium-term budgetary frameworks or expenditure ceilings that can be changed annually.
  - Includes only de jure arrangements; does not measure de facto compliance.
  - Classifies rules as debt rules, budget balance rules, expenditure rules, or revenue rules according to the aggregate targeted.
- Drivers of adoption:
  - Membership in currency unions (e.g., euro area, ECCU in 1998, WAEMU in 2000, CEMAC in 2002) promoted fiscal policy convergence.
  - About one-half of EMDE adoptions (mostly Latin America and South Asia) occurred during fiscal crises or debt distress as part of stabilization plans, often with fiscal responsibility laws.
  - A second group (mostly Eastern Europe and Africa) adopted rules as part of a “second wave” liberalization to strengthen earlier consolidations, often alongside medium-term expenditure frameworks.
  - In about one-half of the EMDEs that are not members of a currency union, rules were introduced during an IMF program.
- Types and coverage:
  - Budget balance rules and debt rules are most commonly used in both EMDEs and advanced economies; revenue rules are relatively rare.
  - Most rules in EMDEs only cover the central government.
  - Advanced economies and emerging European economies are more likely to combine multiple rules; only half of EMDEs with fiscal rules use the debt rule and budget balance rule combination, and one third only uses one rule—mostly a debt rule.
- Changes and suspensions:
  - Before the crisis, changes in fiscal rules were relatively more frequent in EMDEs than in advanced economies.
  - Since the onset of the crisis, changes have become less frequent in EMDEs, with a larger number resorting to suspending the rule.

### Fiscal Rules and Procyclicality: Literature Overview
- Empirical consensus: Fiscal policy tends to be more procyclical in EMDEs (cited studies include Perotti and Gavin 1997; Kaminsky and others 2004; Alesina and others 2008; Ilzetzki and Vegh 2008; Lledó and others 2011).
- Explanations for EMDE procyclicality:
  - Financial constraints: limited access to financial markets forces spending cuts and revenue increases in downturns.
  - Political and administrative constraints: pressures to increase expenditure and lower taxes in good times; weak implementation capacities and forecasting difficulties.
  - Higher economic volatility and less predictable cycles limit capacity for countercyclical fiscal stance.
- Evidence of recent reduction:
  - Some studies report a decline in procyclicality over the 2000s for subsets of developing economies (Frankel and others 2013; Lledó, Yackovlev, and Gadenne 2011; IMF 2010; Guerguil and others 2014).
  - Institutional quality and stronger budget institutions are associated with more countercyclical behavior (Frankel and others 2013; Dabla-Norris and others 2010).
- Conceptual ambiguity:
  - Fiscal rules can discipline overspending in booms and, if paired with stronger public financial management, improve access to markets in bad times.
  - Conversely, rules can constrain authorities’ ability to respond to business cycle fluctuations, potentially exacerbating procyclicality.
  - Manasse (2005) frames a trade-off: rules reduce average deficit bias but may impose stabilization costs; countercyclical policies may be feasible only in very good or very bad times.
- Empirical challenges:
  - Measuring commitment and compliance is political and hard to observe.
  - Outcomes are influenced by many unobserved factors and reverse causality is likely.
  - Short and noisy data series in EMDEs complicate causal inference.

### Empirical Analysis: Data and Methods
- Objective: Explore associations between fiscal rules and the cyclicality of public spending (not the budget balance).
- Rationale for focusing on spending: tax receipts are endogenous to the cycle; expenditure better reflects discretionary fiscal policy.
- Data and methodology:
  - Data on general government spending and GDP from the IMF’s World Economic Outlook (WEO) database.
  - Cyclical components obtained through the Hodrick-Prescott filter.
  - Linear regressions calculate correlation coefficients between cyclical components of real spending and real GDP.
  - Analysis on an unbalanced panel of 156 countries (31 advanced economies and 125 EMDEs).
  - Results use a smoothing parameter of 100; Appendix II reports alternative HP smoothing parameters as in Ravn and Uhlig (2002).
- Methodological limitations:
  - Assessment based on ex-post outcomes rather than policy design.
  - Cyclicality compared to the presence of a rule, not ex-post compliance.
  - Analysis reports correlation coefficients, not causality.
  - Short time series and data limitations restrict more elaborate statistical strategies.

### Key Empirical Findings and Key Statistics
- Average cyclicality (1995–2012; lambda = 100 unless noted):
  - Full-sample correlation coefficient: 0.126.
  - Advanced economies: −0.039.
  - EMDEs: 0.137.
  - EMDE regional coefficients: Africa 0.208; Asia 0.125; Latin America 0.240; Europe 0.210; Middle East 0.528.
- Regression coefficients (1995–2012 summary):
  - All: 0.126 (standard error 0.0172).
  - Advanced: −0.0387 (standard error 0.00811).
  - EMDEs: 0.137 (standard error 0.0347).
- Country counts by cyclical stance (1995–2012):
  - Countercyclical countries: 39 (14 advanced economies; 25 EMDEs).
  - Procyclical countries: 117 (17 advanced economies; remainder EMDEs).
- Aggregate regional observation: fiscal policy is relatively more procyclical in the Middle East and relatively less procyclical in Asia among EMDEs.
- Fiscal rules and measured cyclicality (1995–2012):
  - Countries with no fiscal rules (All): 0.210; Advanced: 0.046; EMDEs: 0.412; Africa 0.204; Asia 0.270; Latin America 0.305; Europe 0.199; Middle East 0.528.
  - Countries with fiscal rules (All): 0.117; Advanced: −0.321; EMDEs: 0.125; Africa 0.224; Asia 0.124; Latin America 0.193; Europe 0.552.
  - Interpretation: About one half of advanced economies with fiscal rules show a negative coefficient, compared to less than one fourth of EMDEs with fiscal rules. For advanced economies, presence of a fiscal rule on average is associated with a countercyclical fiscal stance; for EMDEs, the stance remains procyclical on average.
- Rule-type associations:
  - Expenditure rules are associated with more countercyclicality than debt or budget-balance rules in the full sample.
  - For EMDEs specifically, presence of a rule (including an expenditure rule) does not make a sizeable difference in procyclicality.
- Robustness to HP smoothing parameters (selected lambda results, 1995–2012):
  - lambda = 6.25: All 0.169; Advanced −0.0609; EMDEs 0.199.
  - lambda = 40: All 0.137; Advanced −0.0492; EMDEs 0.153.
  - lambda = 60: All 0.132; Advanced −0.0445; EMDEs 0.146.
  - lambda = 100: All 0.126; Advanced −0.0387; EMDEs 0.137.
- Observations and goodness of fit (lambda = 100, full sample):
  - Observations: All 2,564; Advanced 546; EMDEs 2,018.
  - R-squared: All 0.104; Advanced 0.009; EMDEs 0.124.

### Rule Design Features Associated with Less Procyclicality
- Cyclically-adjusted balance targets:
  - By 2012, only four EMDEs had cyclically-adjusted targets in their rules: Chile (2001), Colombia (2011), Panama (first in 2002/03 and then in 2009), and Serbia (2009).
  - Targeting a cyclically-adjusted balance tends to improve stabilizing properties of the rule; selected country coefficients centered on rule introduction show improvements in many cases (examples preserved exactly):
    - Australia (1998): Before 0.039; Introduction–2009 −0.349; Introduction–2012 −0.227.
    - Denmark (1992): Before 0.288; Introduction–2009 −0.302; Introduction–2012 −0.277.
    - Finland (1995): Before −0.359; Introduction–2009 −0.115; Introduction–2012 −0.128.
    - Norway (2001): Before −0.015; Introduction–2009 −1.401; Introduction–2012 −0.910.
    - Spain (2003): Before 0.030; Introduction–2009 −0.191; Introduction–2012 0.115.
    - Sweden (2003): Before −0.604; Introduction–2009 0.088; Introduction–2012 0.093.
    - Switzerland (2003): Before −0.204; Introduction–2009 −0.295; Introduction–2012 −0.290.
    - United Kingdom (1997): Before −0.330; Introduction–2009 0.068; Introduction–2012 0.138.
    - Chile (2001): Before −0.017; Introduction–2009 −0.419; Introduction–2012 −0.214.
- Escape clauses:
  - Absence or poor specification of an escape clause is associated with more frequent procyclicality.
  - As of end 2012, 16 EMDEs (including the eight members of the WAEMU) had included an escape clause in their fiscal rules.
  - Effective escape clauses require clear guidelines on qualifying events (including voting rules) and an explicit path back to the rule.
  - Among EMDEs: only Brazil has defined a voting mechanism to activate the escape clause; only Panama, Peru, and Romania have laid out a transition path back to the rule.
  - WAEMU: escape clause allows relaxation during large and temporary negative shocks to real GDP and revenues but does not specify transition path back to the rule.

### Institutional Quality and Procyclicality
- Fiscal rule quality:
  - The fiscal rule index (Schaechter and others 2012) is significantly lower in EMDEs than in advanced economies (index range zero to five), reflecting narrower coverage, weaker enforcement procedures, and absence of monitoring bodies.
  - After shrinking through the mid 2000s, the gap between advanced economies and EMDEs in rule quality has tended to widen in recent years.
- Budget institutions:
  - The budget institutions index (Dabla‑Norris and others 2010) shows a negative relationship with correlation coefficients: better budget institutions are associated with less procyclicality, though the relationship is weak.
  - No clear difference in this relationship between countries with fiscal rules and without fiscal rules, suggesting against a simple selection bias.

### Conclusions and Policy Implications
- Empirical conclusion:
  - The adoption of fiscal rules in EMDEs has not been associated with more acyclical or countercyclical fiscal policies, in contrast with advanced economies.
- Policy recommendations:
  - More flexible fiscal rules (e.g., cyclically-adjusted targets, well‑specified escape clauses) could help reduce the procyclical bias associated with rules in EMDEs.
  - Such flexible rules require higher-quality institutional arrangements: improved monitoring, enforcement mechanisms, and clear procedural details for escape clauses and transition paths.
  - Better fiscal rules alone are unlikely to remove the procyclical bias or substantially enhance fiscal capacity; broader improvements across the fiscal framework are required, from macrofiscal goal selection to budgetary account management.
  - Crafting rules that allow for flexibility within technical and political constraints facing EMDEs can help tilt reforms in the right direction.

### Appendix II — Regression Coefficients with Alternative HP Smoothing Parameters (selected details)
- lambda = 100, 1995–2012 — Full sample and regional breakdown:
  - Cyclical component coefficients: All 0.126*** (0.0172); Advanced −0.0387** (0.00811); EMDEs 0.137*** (0.0347); Africa 0.208*** (0.0186); Asia 0.125*** (0.0170); Latin America 0.240*** (0.0839); Europe 0.210** (0.0475); Middle East 0.528*** −0.007.
  - Observations: All 2,564; Advanced 546; EMDEs 2,018; Africa 667; Asia 335; Latin America 502; Europe 333; Middle East 181.
  - R-squared: All 0.104; Advanced 0.009; EMDEs 0.124; Africa 0.051; Asia 0.119; Latin America 0.286; Europe 0.019; Middle East 0.408.
- lambda = 100, 1995–2012 — Countries with no fiscal rules:
  - Cyclical component coefficients: All 0.210*** (0.0143); Advanced 0.0456 (0.0331); EMDEs 0.412*** (0.0187); Africa 0.204*** (0.0380); Asia 0.270*** (0.0463); Latin America 0.305*** (0.0186); Europe 0.199** (0.0975); Middle East 0.528*** (0.0475).
  - Observations: All 1,610; Advanced 100; EMDEs 1,510; Africa 474; Asia 294; Latin America 307; Europe 254; Middle East 181.
  - R-squared: All 0.118; Advanced 0.019; EMDEs 0.243; Africa 0.058; Asia 0.105; Latin America 0.469; Europe 0.016; Middle East 0.408.
- lambda = 100, 1995–2012 — Countries with fiscal rules:
  - Cyclical component coefficients: All 0.117*** (0.0111); Advanced −0.321*** (0.0230); EMDEs 0.125*** (0.0149); Africa 0.224*** (0.0799); Asia 0.124** (0.0532); Latin America 0.193*** (0.0298); Europe 0.552*** (0.0303); Middle East: data truncated.
  - Observations: All 950; Advanced 446; EMDEs 504; Africa 193; Asia 41; Latin America 191; Europe 79.
  - R-squared: All 0.106; Advanced 0.305; EMDEs 0.123; Africa 0.040; Asia 0.123; Latin America 0.181; Europe 0.812.
- Selected alternative lambda results:
  - lambda = 6.25: All 0.169***; Advanced −0.0609***; EMDEs 0.199***; Observations All 2,564; R-squared All 0.100.
  - lambda = 40: All 0.137***; Advanced −0.0492***; EMDEs 0.153***; Observations All 2,564; R-squared All 0.096.
  - lambda = 60: All 0.132***; Advanced −0.0445***; EMDEs 0.146***; Observations All 2,564; R-squared All 0.098.
- Note: Standard errors in parentheses, ***p< 0.01, **p< 0.05, *p< 0.1.

*Source: _wp14122 - 1. National Rules and IMF Programs (IMF Fiscal Rules Database and related analysis, extracted content).*

### 1. National Rules and IMF Programs .....................................................................................

### 1. National Rules and IMF Programs

### Introduction
- Purpose: Document the spread and impact of fiscal rules in the developing world and explore the relation between fiscal rules and procyclical fiscal policy in EMDEs.
- Context: Fiscal rules were formerly concentrated in advanced economies but have been increasingly adopted by emerging market and developing economies (EMDEs) over the past 15 years.
- Approach: Use simple methodologies and correlations to explore associations (not causality) between the presence/features of fiscal rules and measures of spending procyclicality, acknowledging limits from reverse causality, unobservable factors, and short time series.

### Fiscal Rules in EMDEs
- Adoption trends:
  - Since the early 2000s, EMDEs outnumber advanced economies as users of fiscal rules: 47 of them had a fiscal rule in place in 2012, compared with 28 advanced economies.
  - As of end 2012, out of a total of 76 countries with one or more fiscal rules in place, 28 were advanced economies and 48 EMDEs.
- Database scope (following Schaechter and others, 2012):
  - Includes rules with specific numerical targets fixed in legislation and arrangements where targets can be revised but are binding for a minimum of three years.
  - Excludes medium-term budgetary frameworks or expenditure ceilings that can be changed annually.
  - Includes only de jure arrangements; does not measure de facto compliance.
  - Classifies rules as debt rules, budget balance rules, expenditure rules, or revenue rules according to the aggregate targeted.
- Drivers of adoption:
  - Membership in currency unions has been important (e.g., euro area, ECCU in 1998, WAEMU in 2000, CEMAC in 2002) to facilitate fiscal policy convergence.
  - About half of EMDE adoptions (mostly Latin America and South Asia) occurred during fiscal crises or debt distress as part of stabilization plans, often with fiscal responsibility laws.
  - A second group (mostly Eastern Europe and Africa) adopted rules as part of “second wave” liberalization to strengthen earlier consolidations, often alongside medium-term expenditure frameworks.
  - In about one-half of the EMDEs that are not members of a currency union, rules were introduced during an IMF program.
- Types and coverage:
  - Of the four rule types, budget balance rules and debt rules are most commonly used in both EMDEs and advanced economies.
  - Revenue rules are relatively rare.
  - In contrast with advanced economies, most rules in EMDEs only cover the central government, often reflecting data availability limitations.
  - Advanced economies and emerging European economies are more likely to combine multiple rules (debt + budget balance + often expenditure rules); only half of EMDEs with fiscal rules use the debt rule and budget balance rule combination, and one third only uses one rule—mostly a debt rule.
- Changes and suspensions:
  - Before the crisis, changes in fiscal rules were relatively more frequent in EMDEs than in advanced economies, reflecting both sophistication (e.g., cyclically-adjusted targets) and simplification of rules.
  - Since the onset of the crisis, changes have become less frequent in EMDEs, with a larger number resorting to suspending the rule.

### Fiscal Rules and Procyclicality: Literature Overview
- Empirical consensus: Fiscal policy tends to be more procyclical in EMDEs (cited studies: Perotti and Gavin 1997; Kaminsky and others 2004; Alesina and others 2008; Ilzetzki and Vegh 2008; Lledó and others 2011).
- Explanations for EMDE procyclicality:
  - Financial constraints: limited access to financial markets forces spending cuts and revenue increases in downturns.
  - Political and administrative constraints: in good times, pressures to increase expenditure and lower taxes; weak implementation capacities and forecasting difficulties.
  - Higher economic volatility and less predictable cycles limit capacity for countercyclical fiscal stance.
- Evidence of recent reduction:
  - Some studies report a decline in procyclicality over the 2000s for subsets of developing economies (Frankel and others 2013; Lledó, Yackovlev, and Gadenne 2011; IMF 2010; Guerguil and others 2014).
  - Institutional quality and stronger budget institutions are associated with more countercyclical behavior (Frankel and others 2013; Dabla-Norris and others 2010).
- Conceptual ambiguity of fiscal rules’ impact:
  - Rules can discipline overspending in booms and, if paired with stronger public financial management, improve access to markets in bad times.
  - Conversely, rules can constrain authorities’ ability to respond to business cycle fluctuations, potentially exacerbating procyclicality.
  - Manasse (2005) frames a trade-off: rules reduce average deficit bias but may impose stabilization costs; countercyclical policies may be feasible only in very good or very bad times.
- Empirical challenges:
  - Measuring commitment and compliance is political and hard to observe.
  - Outcomes are influenced by many unobserved factors and reverse causality is likely.
  - Short and noisy data series in EMDEs complicate causal inference.

### Fiscal Rules and Procyclicality in EMDEs: Empirical Analysis
- Objective: Explore associations between fiscal rules and the cyclicality of public spending (not the budget balance), extending Frankel and others (2013).
- Rationale for focusing on spending: tax receipts are endogenous to the cycle; expenditure better reflects discretionary fiscal policy.
- Data and methods:
  - Data on general government spending and GDP from the IMF’s World Economic Outlook (WEO) database.
  - Cyclical components obtained through the Hodrick-Prescott filter.
  - Use linear regressions to calculate correlation coefficients between cyclical components of real spending and real GDP.
  - Analysis conducted on an unbalanced panel of 156 countries (31 advanced economies and 125 EMDEs).
  - Results shown in the paper use a smoothing parameter of 100; Appendix II reports results with alternative HP smoothing parameters within the range suggested by Ravn and Uhlig (2002).
- Methodological limitations highlighted:
  - Assessment is based on ex-post outcomes rather than policy design.
  - Cyclicality is compared to the presence of a rule, not ex-post compliance.
  - The analysis reports correlation coefficients, not causality.
  - Short time series and data limitations make more elaborate statistical strategies questionable, so correlation coefficients are used as the most practical instrument.

### Key Empirical Findings
- Average cyclicality:
  - The exercise confirms that on average, public expenditure is procyclical in EMDEs and broadly acyclical in advanced economies.
  - Correlation for the whole sample is about 0.13, with a coefficient of about 0.13 for the full sample (positive indicates procyclicality; negative indicates countercyclicality).
- Main findings (as stated in the paper):
  - Since the early 2000s, EMDEs outnumber advanced economies as users of fiscal rules: 47 of them had a fiscal rule in place in 2012, compared with 28 advanced economies.
  - In addition to becoming part of the standard toolkit of currency unions around the world, fiscal rules have been often used in EMDEs to strengthen fiscal frameworks during and after large stabilization and policy reform episodes.
  - The greater use of fiscal rules has not shielded EMDEs from procyclicality. In fact, unlike in advanced economies, fiscal policy in EMDEs remains procyclical following the adoption of a fiscal rule.
  - While it is impossible to establish causality, there is some 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.

### Empirical Caveats and Interpretation
- The paper emphasizes that the associations found do not establish causality.
- Measuring the strength, design details, and compliance to rules is essential but difficult; observed outcomes reflect a broader package of institutional changes and omitted variables.
- The short time span and potential structural breaks in EMDEs’ data call for cautious interpretation of correlation-based results.

*Source: _wp14122 - 1. National Rules and IMF Programs (IMF Fiscal Rules Database and related analysis, extracted content).*

### 0.14 for EMDEs and a negative coefficient of 0.04 for advanced economies. Among EMDEs,

### _wp14122 - 0.14 for EMDEs and a negative coefficient of 0.04 for advanced economies. Among EMDEs,

### Findings on procyclicality of fiscal policy (1995–2012)
- Regression coefficients:
  - All: 0.126
  - Advanced: −0.039
  - EMDEs: 0.137
  - EMDEs by region: Africa 0.208; Asia 0.125; Latin America 0.240; Europe 0.210; Middle East 0.528
- Country counts by cyclical stance:
  - Countercyclical countries: 39 (14 advanced economies; 25 EMDEs)
  - Procyclical countries: 117 (17 advanced economies; remainder EMDEs)
- Aggregate observation: fiscal policy is relatively more procyclical in the Middle East and relatively less procyclical in Asia among EMDEs.

### Fiscal rules and measured cyclicality
- Overall coefficients under fiscal rules (1995–2012):
  - No fiscal rules (All): 0.210; Advanced: 0.046; EMDEs: 0.412; EMDE regions: Africa 0.204; Asia 0.270; Latin America 0.305; Europe 0.199; Middle East 0.528
  - Fiscal rules (All): 0.117; Advanced: −0.321; EMDEs: 0.125; EMDE regions: Africa 0.224; Asia 0.124; Latin America 0.193; Europe 0.552; (one cell shown as "..." in source)
- Interpretation:
  - About one half of advanced economies with fiscal rules show a negative coefficient, compared to less than one fourth of EMDEs with fiscal rules.
  - For advanced economies, the presence of a fiscal rule on average is associated with a countercyclical fiscal stance; for EMDEs, the stance remains procyclical on average.

### Rule types and procyclicality (1995–2012; 2004–2012 for some figures)
- Expenditure (spending) rules are associated with more countercyclicality than debt or budget-balance rules in the full sample.
- For EMDEs specifically, the presence of a rule (including an expenditure rule) does not make a sizeable difference in procyclicality, suggesting advanced economies drive the overall result.

### Rule design features associated with less procyclicality
- Cyclically-adjusted balance targets:
  - By 2012, only four EMDEs had cyclically-adjusted targets in their rules: Chile (2001), Colombia (2011), Panama (first in 2002/03 and then in 2009), and Serbia (2009).
  - Targeting a cyclically-adjusted balance tends to improve the stabilizing properties of the rule; Table 4 shows more countercyclical (or less procyclical) public spending after introducing cyclically-adjusted balance targets, though countercyclicality declined since the onset of the financial crisis.
  - Selected country coefficients (Table 4, periods centered on rule introduction):
    - Australia (1998): Before 0.039; Introduction–2009 −0.349; Introduction–2012 −0.227
    - Denmark (1992): Before 0.288; Introduction–2009 −0.302; Introduction–2012 −0.277
    - Finland (1995): Before −0.359; Introduction–2009 −0.115; Introduction–2012 −0.128
    - Norway (2001): Before −0.015; Introduction–2009 −1.401; Introduction–2012 −0.910
    - Spain (2003): Before 0.030; Introduction–2009 −0.191; Introduction–2012 0.115
    - Sweden (2003): Before −0.604; Introduction–2009 0.088; Introduction–2012 0.093
    - Switzerland (2003): Before −0.204; Introduction–2009 −0.295; Introduction–2012 −0.290
    - United Kingdom (1997): Before −0.330; Introduction–2009 0.068; Introduction–2012 0.138
    - Chile (2001): Before −0.017; Introduction–2009 −0.419; Introduction–2012 −0.214
- Escape clauses:
  - Absence or poor specification of an escape clause is associated with more frequent procyclicality.
  - As of end 2012, 16 EMDEs (including the eight members of the WAEMU) had included an escape clause in their fiscal rules.
  - For effective escape clauses, clear guidelines are needed on qualifying events (including voting rules) and an explicit path back to the rule.
  - Among EMDEs: only Brazil has defined a voting mechanism to activate the escape clause; only Panama, Peru, and Romania have laid out a transition path back to the rule.
  - WAEMU: escape clause allows relaxation during large and temporary negative shocks to real GDP and revenues but does not specify transition path back to the rule.

### Institutional quality and procyclicality
- Fiscal rule quality:
  - The fiscal rule index (Schaechter and others 2012) is significantly lower in EMDEs than in advanced economies (index range zero to five), reflecting narrower coverage, weaker enforcement procedures, and absence of monitoring bodies.
  - After shrinking through the mid 2000s, the gap between advanced economies and EMDEs in rule quality has tended to widen in recent years.
- Budget institutions:
  - The budget institutions index (Dabla‑Norris and others 2010) shows a negative relationship with correlation coefficients: better budget institutions are associated with less procyclicality, though the relationship is weak.
  - No clear difference in this relationship between countries with fiscal rules and without fiscal rules, suggesting against a simple selection bias (i.e., weaker institutions adopting rules to boost governance).

### Conclusions and policy implications
- Empirical conclusion:
  - The adoption of fiscal rules in EMDEs has not been associated with more acyclical or countercyclical fiscal policies, in contrast with advanced economies.
- Policy implications and recommendations:
  - More flexible fiscal rules (e.g., cyclically-adjusted targets, well‑specified escape clauses) could help reduce the procyclical bias associated with rules in EMDEs.
  - Such flexible rules require higher-quality institutional arrangements: improved monitoring, enforcement mechanisms, and clear procedural details for escape clauses and transition paths.
  - Better fiscal rules alone are unlikely to remove the procyclical bias or substantially enhance fiscal capacity; broader improvements across the fiscal framework are required, from macrofiscal goal selection to budgetary account management.
  - Nonetheless, crafting rules that allow for flexibility within technical and political constraints facing EMDEs can help tilt reforms in the right direction.

*Sources: IMF Fiscal Rules Database (2012); IMF World Economic Outlook; and IMF staff estimates.*

### Appendix II. Regression Coefficients with Alternative HP Smoothing Parameters

### Appendix II. Regression Coefficients with Alternative HP Smoothing Parameters

### lambda = 100, 1995–2012 — Full sample and regional breakdown
- Cyclical component of real GDP coefficients (standard errors in parentheses where provided):
  - All: 0.126*** (0.0172)
  - Advanced: −0.0387** (0.00811)
  - EMDEs: 0.137*** (0.0347)
  - Africa: 0.208*** (0.0186)
  - Asia: 0.125*** (0.0170)
  - Latin America: 0.240*** (0.0839)
  - Europe: 0.210** (0.0475)
  - Middle East: 0.528*** −0.007
- Constant terms (standard errors in parentheses where provided):
  - All: −11.59 (58.17)
  - Advanced: 12.25 (54.62)
  - EMDEs: −19.22 (4.139)
  - Africa: −0.883 (301.2)
  - Asia: −77.89 (31.41)
  - Latin America: 20.51 (70.28)
  - Europe: −22.21 (162.8)
  - Middle East: −20.29 −45.03
- Observations:
  - All: 2564
  - Advanced: 546
  - EMDEs: 2,018
  - Africa: 667
  - Asia: 335
  - Latin America: 502
  - Europe: 333
  - Middle East: 181
- R-squared:
  - All: 0.104
  - Advanced: 0.009
  - EMDEs: 0.124
  - Africa: 0.051
  - Asia: 0.119
  - Latin America: 0.286
  - Europe: 0.019
  - Middle East: 0.408

### lambda = 100, 1995–2012 — Countries with no fiscal rules
- Cyclical component of real GDP coefficients (standard errors in parentheses where provided):
  - All: 0.210*** (0.0143)
  - Advanced: 0.0456 (0.0331)
  - EMDEs: 0.412*** (0.0187)
  - Africa: 0.204*** (0.0380)
  - Asia: 0.270*** (0.0463)
  - Latin America: 0.305*** (0.0186)
  - Europe: 0.199** (0.0975)
  - Middle East: 0.528*** (0.0475)
- Constant terms (standard errors in parentheses where provided):
  - All: −2.142 (33.38)
  - Advanced: 2.832 (229.8)
  - EMDEs: −2.808 (30.20)
  - Africa: 0.439 (4.746)
  - Asia: 0.157 (79.01)
  - Latin America: 35.66 (28.11)
  - Europe: −31.46 (92.19)
  - Middle East: −20.29 (162.8)
- Observations:
  - All: 1,610
  - Advanced: 100
  - EMDEs: 1,510
  - Africa: 474
  - Asia: 294
  - Latin America: 307
  - Europe: 254
  - Middle East: 181
- R-squared:
  - All: 0.118
  - Advanced: 0.019
  - EMDEs: 0.243
  - Africa: 0.058
  - Asia: 0.105
  - Latin America: 0.469
  - Europe: 0.016
  - Middle East: 0.408

### lambda = 100, 1995–2012 — Countries with fiscal rules
- Cyclical component of real GDP coefficients (standard errors in parentheses where provided):
  - All: 0.117*** (0.0111)
  - Advanced: −0.321*** (0.0230)
  - EMDEs: 0.125*** (0.0149)
  - Africa: 0.224*** (0.0799)
  - Asia: 0.124** (0.0532)
  - Latin America: 0.193*** (0.0298)
  - Europe: 0.552*** (0.0303)
  - Middle East: ... (data truncated)
- Constant terms (standard errors in parentheses where provided):
  - All: −27.86 (107.3)
  - Advanced: 6.378 (41.35)
  - EMDEs: −69.49 (196.3)
  - Africa: −4.201 (8.333)
  - Asia: −638.6 (2,446)
  - Latin America: −29.86 (68.66)
  - Europe: 0.973 (8.769)
  - Middle East: ... (data truncated)
- Observations:
  - All: 950
  - Advanced: 446
  - EMDEs: 504
  - Africa: 193
  - Asia: 41
  - Latin America: 191
  - Europe: 79
  - Middle East: ... (data truncated)
- R-squared:
  - All: 0.106
  - Advanced: 0.305
  - EMDEs: 0.123
  - Africa: 0.040
  - Asia: 0.123
  - Latin America: 0.181
  - Europe: 0.812
  - Middle East: ... (data truncated)

### lambda = 6.25, 1995–2012
- Cyclical component of real GDP coefficients (standard errors in parentheses where provided):
  - All: 0.169*** −0.0609*** 0.199*** 0.126** 0.202*** 0.107*** −0.0364 0.122**
  - (−0.01) (0.0120) (0.0116) (0.0525) (0.0277) (0.0260) (0.0792) (0.0619)
- Constant terms (standard errors in parentheses where provided):
  - All: −9.7 −38.82 3.627 (33.78) −14.09 (47.81) −0.331 (3.288) −66.13 (274.1) 6.640 (23.45) −7.094 (46.20) −44.30 (127.3)
  - (Note: table formatting presents constants and standard errors across columns; numbers preserved as in source.)
- Observations:
  - All: 2564
  - Advanced: 546
  - EMDEs: 2,018
  - Africa: 667
  - Asia: 335
  - Latin America: 502
  - Europe: 333
  - Middle East: 181
- R-squared:
  - All: 0.100
  - Advanced: 0.045
  - EMDEs: 0.126
  - Africa: 0.009
  - Asia: 0.138
  - Latin America: 0.033
  - Europe: 0.001
  - Middle East: 0.021

### lambda = 40, 1995–2012
- Cyclical component of real GDP coefficients (standard errors in parentheses where provided):
  - All: 0.137*** −0.0492*** 0.153*** 0.180*** 0.145*** 0.215*** 0.103 0.439***
  - (−0.008) (0.0148) (0.00941) (0.0412) (0.0220) (0.0195) (0.0816) (0.0546)
- Constant terms (standard errors in parentheses where provided):
  - All: −11.32 −43.19 8.952 (47.66) −18.11 (52.86) −0.537 (3.879) −77.14 (297.2) 14.94 (28.81) −20.48 (59.90) −42.65 (155.0)
- Observations:
  - All: 2564
  - Advanced: 546
  - EMDEs: 2,018
  - Africa: 667
  - Asia: 335
  - Latin America: 502
  - Europe: 333
  - Middle East: 181
- R-squared:
  - All: 0.096
  - Advanced: 0.020
  - EMDEs: 0.116
  - Africa: 0.028
  - Asia: 0.116
  - Latin America: 0.196
  - Europe: 0.005
  - Middle East: 0.265

### lambda = 60, 1995–2012
- Cyclical component of real GDP coefficients (standard errors in parentheses where provided):
  - All: 0.132*** −0.0445*** 0.146*** 0.192*** 0.136*** 0.229*** 0.168** 0.490***
  - (−0.008) (0.0158) (0.00888) (0.0382) (0.0206) (0.0184) (0.0835) (0.0515)
- Constant terms (standard errors in parentheses where provided):
  - All: −11.41 −44.04 10.51 (52.28) −18.64 (53.69) −0.659 (3.995) −77.51 (299.3) 17.37 (30.02) −21.39 (64.44) −34.29 (159.2)
- Observations:
  - All: 2564
  - Advanced: 546
  - EMDEs: 2,018
  - Africa: 667
  - Asia: 335
  - Latin America: 502
  - Europe: 333
  - Middle East: 181
- R-squared:
  - All: 0.098
  - Advanced: 0.014
  - EMDEs: 0.118
  - Africa: 0.036
  - Asia: 0.115
  - Latin America: 0.237
  - Europe: 0.012
  - Middle East: 0.336

- Note: Standard errors in parentheses, ***p< 0.01, **p< 0.05, *p< 0.1.

*Sources: IMF Fiscal Rules Database (2012); IMF World Economic Outlook; and IMF staff estimates.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14122.pdf_