Flexible Fiscal Rules and Countercyclical Fiscal Policy
IMF Working Papers, January 22, 2016
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Bibliographic details
- Authors: Martine Guerguil, Pierre Mandon, Rene Tapsoba
- Published: January 22, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513581460.001
Summary findings
- The paper assesses the impact of different types of flexible fiscal rules on the procyclicality of fiscal policy using propensity scores-matching techniques to mitigate traditional self-selection problems.
- Not all fiscal rules have the same impact: the design matters.
- Investment-friendly rules reduce the procyclicality of both overall and investment spending.
- The effect of investment-friendly rules appears stronger in bad times and when the rule is enacted at the national level.
- The introduction of escape clauses in fiscal rules does not seem to affect the cyclical stance of public spending.
- The inclusion of cyclical adjustment features in spending rules yields broadly similar results to investment-friendly rules.
- Results are mixed for cyclically-adjusted budget balance rules:
- Enacting cyclically-adjusted budget balance rules is associated with countercyclical movements in overall spending.
- Enacting cyclically-adjusted budget balance rules is associated with procyclical changes in investment spending.
Heterogeneity and structural influences
- Structural factors influence the link between fiscal rules and countercyclicality, including:
- past debt
- the level of development
- the volatility of terms of trade
- natural resources endowment
- government stability
- the legal enforcement and monitoring arrangements backing the rule
Robustness and methodology
- The study employs propensity scores-matching techniques to mitigate self-selection problems.
- The results are robust to a wide set of alternative specifications.
Policy design implications
- Rule design matters for achieving countercyclical fiscal outcomes; specifically:
- Favoring investment-friendly rule designs can help reduce procyclicality in both overall and investment spending.
- National-level adoption of investment-friendly rules can strengthen countercyclical effects, especially in bad times.
- Including escape clauses does not appear to change the cyclical stance of public spending.
- Cyclical adjustment features in spending rules can produce similar outcomes to investment-friendly rules, but cyclically-adjusted budget balance rules require careful consideration due to mixed effects on investment spending.
- Policymakers should account for structural characteristics (debt levels, development status, terms-of-trade volatility, natural resource endowments, government stability, and enforcement/monitoring arrangements) when designing fiscal rules to achieve desired countercyclical objectives.
Martine Guerguil, Pierre Mandon, and Rene Tapsoba. "Flexible Fiscal Rules and Countercyclical Fiscal Policy", IMF Working Papers 2016, 008 (2016), accessed 9/15/2026, https://doi.org/10.5089/9781513581460.001