Fiscal Rules, Fiscal Space and Procyclical Fiscal Policy

31 Pages Posted: 27 Jun 2019

See all articles by Carolin Nerlich

Carolin Nerlich

European Central Bank (ECB) - Directorate General Economics

Wolf Heinrich Reuter

German Council of Economic Experts

Date Written: December 15, 2015

Abstract

In this paper we analyse the interaction of fiscal rules and fiscal space. We find strong evidence for fiscal rules being associated with higher fiscal space. Furthermore, the analysis shows that countries with more fiscal space tend to have higher discretionary expenditures, but that this effect is significantly reduced if fiscal rules are in place. A similar effect can be observed for the procyclicality of fiscal policy, which is significantly higher in an environment of ample fiscal space, while this difference is reduced with fiscal rules. Regarding the different types of fiscal rules, we find the strongest results for expenditure rules and to a lesser extent for balanced budget rules, but none for debt rules.

Keywords: fiscal space, fiscal rules, discretionary fiscal policy, procyclicality

JEL Classification: E61, E62, H60

Suggested Citation

Nerlich, Carolin and Heinrich Reuter, Wolf, Fiscal Rules, Fiscal Space and Procyclical Fiscal Policy (December 15, 2015). ECB Working Paper No. 1872 (2015); ISBN: 978-92-899-1685-1 . Available at SSRN: https://ssrn.com/abstract=3409786

Carolin Nerlich (Contact Author)

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

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Wolf Heinrich Reuter

German Council of Economic Experts

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

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