Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World

By Elva Bova, Nathalie Carcenac, Martine Guerguil

July 10, 2014

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Elva Bova, Nathalie Carcenac, and Martine Guerguil. Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World, (USA: International Monetary Fund, 2014) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper documents the spread of fiscal rules in the developing world and investigates the relation between fiscal rules and procyclical fiscal policy. We find that, since the early 2000s, developing countries outnumbered advanced economies as users of fiscal rules. Rules were adopted either as part of the toolkit to join currency unions or to strengthen fiscal frameworks during and after large stabilization and policy reform episodes. The paper also finds that the greater use of fiscal rules has not shielded these countries from procyclicality, since fiscal policy remains procyclical following the adoption of a fiscal rule. We find 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.

Subject: Expenditure, Financial sector policy and analysis, Fiscal policy, Fiscal rules, Fiscal stance, Procyclicality

Keywords: Asia and Pacific, Budget balance rule combination, Countercyclical fiscal policies, Cyclicality, Debt rule, Developing economies, Economy, EMDE rule, EMDEs, Emerging markets, Europe, Expenditure rule, Fiscal policty, Fiscal rule, Fiscal rules, Fiscal stance, IMF Fiscal Rules Database, IMF staff estimate, Middle East, Number of emerging market and developing economies, Procyclicality, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/122
Stock No:

WPIEA2014122
ISBN:

9781498305525
ISSN:

1018-5941

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