On Promoting Fiscal Discipline: The Role of Exchange Rate Regimes, Fiscal Rules and Institutions

36 Pages Posted: 7 Aug 2019

Date Written: August 6, 2019

Abstract

This paper examines how fiscal rules, exchange rate regimes, and institutional quality affect the cyclical behavior of fiscal policy (how government spending responds to fluctuations in gross domestic product). The analysis is performed on a panel of 153 advanced, emerging, and developing countries over 1993-2015 using local Gaussian-weighted ordinary least squares and two-stage least squares estimators. The findings show that the adoption of fiscal rules alone is not sufficient to promote countercyclical fiscal policy and should be combined with strong institutions. Moreover, fiscal rules seem to limit procyclicality, especially in countries with flexible exchange rate regimes rather than in countries with fixed exchange rates. The analysis also finds that the disciplining effect of fiscal rules depends on the type of rule.

Keywords: Macro-Fiscal Policy, Public Finance Decentralization and Poverty Reduction, Macroeconomics and Economic Growth, Economic Policy, Institutions and Governance, Economic Adjustment and Lending, Public Sector Economics, Fiscal & Monetary Policy, National Governance, Social Analysis, Government Policies, Quality of Life & Leisure, Youth and Governance, Macroeconomic Management, Public Financial Management

Suggested Citation

Keita, Kady Synthia and Turcu, Camelia, On Promoting Fiscal Discipline: The Role of Exchange Rate Regimes, Fiscal Rules and Institutions (August 6, 2019). World Bank Policy Research Working Paper No. 8964. Available at SSRN: https://ssrn.com/abstract=3433471

Kady Synthia Keita (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Camelia Turcu

University of Orleans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

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