## 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

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### 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*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/flexible-fiscal-rules-and-countercyclical-fiscal-policy-43641_