The Case for Restricting Fiscal Policy Discretion

37 Pages Posted: 18 Apr 2002

See all articles by Antonio Fatás

Antonio Fatás

INSEAD; Centre for Economic Policy Research (CEPR); ABFER

Ilian Mihov

INSEAD; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2002

Abstract

This Paper studies how discretionary fiscal policy affects output volatility and the rate of economic growth. Using data on fifty-one countries we isolate five empirical regularities: (1) Governments that use often fiscal policy make their economies volatile; (2) The use of fiscal policy is explained to a large extent by the presence of political constraints and other political and institutional variables; (3) The volatility of output induced by discretionary fiscal policy lowers economic growth by 0.6 percentage points for every percentage point increase in volatility; (4) There is evidence that the increase in volatility is in part due to electoral cycles; nevertheless, we do find that political constraints restrain fiscal policy beyond their impact on the traditional election-year volatility; (5) Rules-based fiscal policy identified by the degree of automatic stabilizers in the economy helps to stabilize business cycles. The evidence in the Paper argues in favour of imposing institutional restrictions on governments as a way of reducing output volatility and increasing the rate of economic growth.

Keywords: Fiscal policy, business cycle volatility, political constraints, economic growth

JEL Classification: E32, E62

Suggested Citation

Fatas, Antonio and Mihov, Ilian, The Case for Restricting Fiscal Policy Discretion (March 2002). CEPR Discussion Paper No. 3277. Available at SSRN: https://ssrn.com/abstract=307878

Antonio Fatas (Contact Author)

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore
+6567995384 (Phone)

HOME PAGE: http://faculty.insead.edu/fatas

Centre for Economic Policy Research (CEPR)

London
United Kingdom

ABFER ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Ilian Mihov

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, Singapore 138680
Singapore
+65 6799 5434 (Phone)

HOME PAGE: http://www.insead.edu/facultyresearch/faculty/personal/imihov/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
25
Abstract Views
1,634
PlumX Metrics