The Credibility Of Fiscal Rules Policy And Business Cycle Volatility

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policy. Economists and policy-makers now agree that fiscal policy, once thought to be capable of helping to smooth fluctuations in real growth, is not up to the task. Central banks are the sole remaining policy-making bodies thought capable of reducing business-cycle fluctuations. How should we think about the central banker s problem?


budget balance exacerbates the business cycle fluctuations. In turn, Galí and Perotti (2003) investigated whether the Maastricht Treaty and the Stability and Growth Pact in Europe weakened the ability of European governments to conduct a stabilizing fiscal policy. This is done by estimating fiscal rules for the discretionary budget deficit in the

The Implication of Monetary and Fiscal Policy Interactions

contrast fiscal policy should have a less activist role and passively respond to the business cycle using automatic stabilisers, while focusing upon balancing the government budget, see Walsh (2010). During the Great Recession however, the United States actively responded to the economic downturn using both monetary and fiscal policy.

Fiscal discipline and economic growth the case of Romania

2009 and evaluates the role of the fiscal policy during the business cycle. The paper concludes that the fiscal policy in Romania was highly procyclical, exacerbating the economic cycle. In order to escape from this procyclicality, Romania needs deep structural reforms in order to restore the sustainability of


(2008) found that fiscal rules tend to encourage higher cyclically-adjusted primary balances in the EU and may reduce pro-cyclicality. On the other hand, Manase (2005) claims that fiscal rules tend to limit the ability of fiscal authorities to react to business cycle fluctuations, thus potentially exacerbating volatility.

The Role of Credibility in the Cyclical Properties of

business cycle and the proxy for country risk in both equations for the cyclical policy stance. At low levels of country risk (or high policy credibility) we anticipate fiscal and monetary policies to be countercyclical and hence expect coefficients 0' and y' to be positive. At high levels of country risk

The Role of Expectations in Monetary Policy ECON 4673 Dr

monetary policy (and fiscal policy) usually result in increased output volatility and low economic growth. Although most central banks are subject to some pressure from politicians, most economists believe some level of central bank independence is necessary to achieve long-run price stability. 5.

Chile s Fiscal Rule - RePEc

fiscal rules decrease the ability of governments to use fiscal policy to smooth the business cycle and therefore can lead to a significant increase in output volatility. Alesina and Bayoumi (1996), using similar data, find no significant relationship between GDP volatility and the stringency of fiscal controls. Fatas and Mihov (2002) using a cross-

Fiscal Discipline, Volatility and Growth

greedy politicians can generate substantial volatility in fiscal policy instruments. 2 The empirical evidence on discretionary fiscal policy leads to two main conclusions. First, there are significant politically-motivated changes in fiscal policy. By using data for a large sample of countries recent works by Persson (2001) and Shi and Svensson

Chapter 7 Chile s New Fiscal Rule - Duke University

fiscal rules decrease the ability of governments to use fiscal policy to smooth the business cycle and therefore can lead to a significant increase in output volatility. Alesina and Bayoumi (1996), using similar data, find no significant relationship between GDP volatility and the stringency of fiscal controls. Fatas and Mihov (2002) using a cross-

Lessons for Iceland from the monetary policy of Sweden

Rules based (monetary, fiscal, and labour market): inflation target. Rules are followed. Inflation stability but not real economic, exchange rateor financial stability. Free capital flows makes it difficult to be monetary policy independent. The Riksbank is shadowing the elephant (the ECB). Crisis policy without a crisis is now causing growing

Avoiding regulatory wars using international coordination

Policy inconsistencies played an important role in the EME financial crises in the 1980s and 1990s. A well documented illustration is seen in the illusion that, in open economy settings with a pegged or fixed exchange rate, one could run expansionary policies on both the fiscal and monetary fronts for prolonged

Fiscal Rules and Countercyclical Policy: Frank Ramsey Meets

Opponents of fiscal rules emphasize that they prevent the government from smoothing tax rates and expenditures over the business cycle, and may even prohibit discretionary countercyclical policy.2 By contrast, their proponents argue that fiscal rules supplement weak institutions to promote fiscal responsibility and credibility.3 This issue may be

Fiscal policy, public debt and monetary policy in emerging

measuring the degree of policy cyclicality from two separate fiscal and monetary policy reaction functions (from a Taylor rule), the authors show that in a majority of EMEs both fiscal and monetary policies were used to smooth output volatility during 200011.

Interaction Between Monetary Policy and Fiscal Policy: An

where fiscal policy effect the action of monetary policy in various ways ,via short term in demand ,also it has via effect of the confidence and in long- run via the conditions of growth and low inflation, but enhance the monetary policy accommodative to fiscal policy or counter active. In this paper VAR, and

Business and Economics

Keywords: Cycle; Fiscal policy; Fiscal rules Introduction Following the recent global economic crisis and the resulting high budget deficits, countries are adopting and strengthening fiscal rules [1]. The main motive for that policy change is to provide credibility to the fiscal consolidation policy in order to improve the likelihood of

The Euro and Fiscal Policy - NBER

policy; (2) The behavior of fiscal policy over the business cycle; (3) Volatility (i.e. changes in fiscal policy that are exogenous to the cycle). Implicitly, we assume that good fiscal policy must be sustainable, possibly countercyclical (but also could be acyclical) and it should not be a significant source of volatility.

Monetary Policy in Fossil Fuel Exporters - World Bank

exporters should look beyond the typical business cycle horizon. In the medium run, resource (fossil fuel) based rents typically lead to much more pronounced fiscal (and credit/asset price) cycles. There is thus a need to ensure that monetary policy is conducted around a credible and sustainable medium fiscal anchor and credit rules.


The room for fiscal policy to react to a downturn is constrained by budget deficits and debt at the outset. In general, the poorer the fiscal position the less reactive governments have been and can be in their response to adverse shocks. Fiscal rules can help prepare for the next downturn by leading to swifter consolidation during the upturn.

Kevin J. Lansing February 10, 2021 -

Optimal Fiscal Policy in a Business Cycle Model with Public Capital, Cana-dian Journal of Economics, 1998, v. 31, pp. 337-364. Optimal Fiscal Policy, Public Capital, and the Productivity Slowdown (with S. Cassou), Journal of Economic Dynamics and Control, 1998, v. 22, pp. 911-935. Growth, Welfare, or Stabilization: A Comparison of Di⁄erent

Essays in the Macroeconomics of Emerging Countries

Business cycle in emerging markets is di erent from the one in developed economies. In the former ones, consumption volatility is usually larger than output volatility and trade balance tends to be largely counter-cyclical, while in the later ones, consump-

Fiscal Volatility Shocks and Economic Activity

I We feed the estimated rules into an estimated equilibrium business cycle model of the U.S. economy. I We simulate the equilibrium using a third-order perturbation (new formulae for analytic non-linear IRFs). FV-G-K-R Fiscal Volatility 5/45

WP/19/70 - IMF eLibrary

trace the evolution of discretionary fiscal policy as the variation not explained by the impact of the business cycle over a long span of time , and thereby identify whether fiscal policy amplifies or counteracts business cycle fluctuations. When fiscal policy is procyclical, the cyclically-adjusted


The author also states that fiscal policy rules are analogous to monetary policy rules, an important role in this picture being detained by anti-cyclical fiscal transfers as a tool to prevent too much output volatility. As we have seen so far, designing fiscal rules is one of the most difficult tasks for policy-makers and supranational


The objective of this paper is to investigate whether the effects of fiscal policy credibility, in the form of deficit rule, debt rule, discretionary, and openness, can affect the stability of interest rates. The main motivation behind this research is on the one hand, the credibility of fiscal policy has an influence on interest rates.

Fiscal Rules in a Volatile World: A Welfare-Based Approach

business cycle, the government should draw down debt or accumulate assets. Again, Chile is one example of a country that has successfully implemented a structural surplus policy in the past decade.8 This paper assesses fiscal rules according to the criteria just mentioned: discipline,

CHAPTER 3 FISCAL POLICY Antonio Fatas and Ilian Mihov

these two components of cyclical fiscal policy.5 2.3. Volatility Fiscal policy can be a trigger of business cycles. When governments implement changes in fiscal policy for political reasons or, more generally, for reasons which are not driven by economic conditions, then the changes will lead to fluctuations in output and consumption.


3.4.1 Simulations under a Single Monetary Policy Rule 71 3.4.2 Simulations under Different Monetary Policy Rules 74 3.5 Macro-Volatility under Different Monetary Policy Rules 77 3.6 Conclusion 78 Chapter 4 Monetary Policy Shocks in the CMA: A Structural VAR Approach 4.1 Introduction 80

Building Countercyclical Fiscal Policies in Latin America

policy rules, and a handful of developing nations are gradually beginning to follow suit. In Latin America, Chile has been successfully its fiscal policy in the managing with framework of uctural budgeta str rule that has enabled the government to establishan effective, transparent, and credible countercyclical fiscal policy stance. Fiscal

Austria's fiscal rules: climbing the

subnational budget balances from the business cycle, the volatility of subnational expenditure combined with the absence of raising power could, by design, revenue-endanger the respect of the targets. In addition, building the credibility of subnational rules linked to macroeconomic variables will require reducing the number of incidents


The Credibility of Fiscal Rules Policy and Business Cycle Volatility 211 stricter fiscal rules that mitigate adverse impacts on growth stemming from big governments or it has gained more from the implementation of credible fiscal rules. The objective of this paper is to analyze the impact of the credibility of fiscal rules on

SYLLABUS University of Chicago Harris School of Public Policy

international financial markets at favorable rates. However, revenue volatility (associated with commodity dependence), expenditure pressures and rigidities, make fiscal adjustments (and compliance with fiscal rules) very hard. We will study fiscal rules and their effectiveness ina number of countries.

Fiscal Rules and Macroeconomic Stability

these rules. Therefore, there is nothing in the design of fiscal rules aimed at preventing huge and long-lasting deviations of debt from the steady state level, which makes them an impediment to fiscal policy carrying out its job as a significant stabilizing policy instrument. Keywords: Fiscal rules, output volatility, automatic stabilizers.


policy regime, when faced with a large gold outflow which threatened its reserves and its convertibility goal (mandate) the central bank would raise its policy rate (the discount rate). The learning process to provide macrostability and to gain credibility was long andeconomic difficult.

1 Credibility and monetary policy in closed and open economies

Monetary Policy, In⁄ation and the Business Cycle Professor: Neville Francis (GA 06G) TA: Huan Zhou This course will provide an overview of the literature on monetary policy aspects of the business cycle, with special emphasis on optimizing sticky price models, their associated in⁄ation dynamics, and their implications for monetary policy.

Business Cycles and Fiscal Policies: The Role of Institutions

Chadha and Nolan (2007) derive optimal simple monetary and fiscal rules from a general-equilibrium model. Taylor (2000) and Chadha and Nolan (2007) show that simple policy rules match quite well U.S. monetary and fiscal policies during the last decades, and the latter authors also provide similar evidence for the United Kingdom. In this paper, we

Fiscal rules and Government borrowing costs Thornton, John

the business cycle ), an explicit limit on, or target for, public debt, a limit on primary or current government spending, or a minimum level of government revenues aimed at boosting revenue collection and/or preventing an excessive tax burden.3 The empirical evidence on the gains from adopting fiscal rules is mixed. Several

Economic Stabilization in the Post-Crisis World: Are Fiscal

stimulus measures during downturns in the business cycle are followed by fiscal contractionary (and debt reducing or moderating) measures during upturns in the business cycle, i.e. counter-cyclical fiscal policy. Activist countercyclical policies would seem desirable for debt management as well as output stabilization purposes.

Fiscal Rules: Towards a New Paradigm for Fiscal

which to anchor fiscal policy, infuse fiscal discipline, and promote credibility. Rules can reduce the likelihood of fiscal policy being subjected to misplaced and sometimes myopic plans of governments. The adoption of fiscal rules, particularly, but not exclusively by developing countries, has increased in recent years.