The Impact of Numerical Expenditure Rules on Budgetary Discipline Over the Cycle

29 Pages Posted: 19 Apr 2010

See all articles by Federic Holm-Hadulla

Federic Holm-Hadulla

European Central Bank (ECB)

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Philipp Rother

European Central Bank (ECB)

Date Written: March 26, 2010

Abstract

We study the impact of numerical expenditure rules on the propensity of governments to deviate from expenditure targets in response to surprises in cyclical conditions. Theoretical considerations suggest that due to political fragmentation in the budgetary process expenditure policy might be prone to a pro-cyclical bias. However, this tendency may be mitigated by numerical expenditure rules. These hypotheses are tested against data from a panel of EU Member States. Our key findings are that (i) deviations between actual and planned government expenditure are positively related to unanticipated changes in the output gap, and (ii) numerical expenditure rules reduce this pro-cyclical bias. Moreover, the pro-cyclical spending bias is found to be particularly pronounced for spending items with a high degree of budgetary flexibility.

Keywords: Expenditure Rules, Fiscal Discipline, Stabilisation, Spending Bias

JEL Classification: C23, E62, H50

Suggested Citation

Holm-Hadulla, Federic and Hauptmeier, Sebastian and Rother, Philipp, The Impact of Numerical Expenditure Rules on Budgetary Discipline Over the Cycle (March 26, 2010). ECB Working Paper No. 1169, Available at SSRN: https://ssrn.com/abstract=1578856

Federic Holm-Hadulla (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Philipp Rother

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 0 (Phone)
+49 16 1344 6398 (Fax)

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