The Case for Restricting Fiscal Policy Discretion

Posted: 15 Jul 2003

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)

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Abstract

This paper studies the effects of discretionary fiscal policy on output volatility and economic growth. Using data for ninety-one countries we isolate three empirical regularities: (1) Governments that use fiscal policy aggressively induce significant macroeconomic instability; (2) The volatility of output caused by discretionary fiscal policy lowers economic growth by more than 0.8 percentage points for every percentage point increase in volatility; (3) Prudent use of fiscal policy is explained to a large extent by the presence of political constraints and other political and institutional variables. The evidence in the paper supports arguments for constraining discretion by imposing institutional restrictions on governments as a way to reduce output volatility and increase the rate of economic growth.

Keywords: Fiscal policy, Business cycles, rules, discretion, growth

JEL Classification: E32, E62

Suggested Citation

Fatas, Antonio and Mihov, Ilian, The Case for Restricting Fiscal Policy Discretion. Quarterly Journal of Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=402600

Antonio Fatas (Contact Author)

INSEAD ( email )

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

Centre for Economic Policy Research (CEPR)

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ABFER ( email )

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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

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