On promoting fiscal discipline: the role of institutions, fiscal rules and exchange rate regimes

Mercredi | 2018-01-18
Salle B103 – 12h00

Kady Synthia KEITA – Camélia TURCU

We explore how fiscal rules, pegged exchange rate regimes and institutional quality affect the cyclical behaviour of fiscal policy (i.e how government spending responds to GDP fluctuations). We perform our analysis on a panel of 153 advanced, emerging and developing countries over the period 1993-2015 using LGWOLS and 2SLS estimators. We find that fiscal rules alone are not enough to promote counter-cyclical fiscal policy and should be combined with better institutions. Moreover, we show that when countries have already constrained their monetary policy by implementing pegged exchange rate regimes, the adoption of fiscal rules would not yield significant beneficial outcomes in terms of fiscal discipline. Pegged exchange rate regimes alone, as well as strong institutions, promote counter-cyclical policies though. We also find that the disciplinary effect of fiscal rules depends on the type of rule.