Fiscal constraints in the European Union - when more is less?

Florin Alexandru Macsim, Florin Oprea

Abstract


This paper examines the implications of fiscal rules measured through the Fiscal Rules Index and fiscal institutions that supervise fiscal policies on key aspects of fiscal policies such as public debt and budget deficits. Our goal was to identify the specific links between fiscal rules, institutions and fiscal policies, to support any rethinking of public policy matters. Our results confirm that the government’s consolidated debt is influenced by both fiscal rules and institutions. Through this research we have showed that an increased number of institutions and fiscal rules is closely related to an increase in public debt levels. We explained this influence by stating that cause may consist in not having one strong and independent institution, but more institutions more or less independent that divide key responsibilities. Also our results indicate that budget deficits aren’t influenced either by supervising institutions or fiscal rules.

Full text: PDF

Keyword(s)


fiscal rules, institutions, fiscal policies, public debt, budget deficits

JEL Codes


H30 - General; E61 - Policy Objectives; H63 - Debt, Debt Management, Sovereig

References


Albuquerque, B., 2011. Fiscal institutions and public spending volatility in Europe. Economic Modelling, 28(6), 2544-2559. doi: http://dx.doi.org/10.1016/j.econmod.2011.07.018

Beetsma, R. M. W. J., and Debrun, X., 2007. The new stability and growth pact: A first assessment. European Economic Review, 51(2), 453-477. doi: http://dx.doi.org/10.1016/j.euroecorev.2005.12.002

Bergman, U. M., and Hutchison, M., 2015. Economic stabilization in the post-crisis world: Are fiscal rules the answer? Journal of International Money and Finance, 52, 82-101. doi: http://dx.doi.org/10.1016/j.jimonfin.2014.11.014

Breuss, F., and Roeger, W., 2005. The SGP fiscal rule in the case of sluggish growth: Simulations with the QUEST model. Journal of Policy Modeling, 27(7), 767-788. doi: http://dx.doi.org/10.1016/j.jpolmod.2005.07.002

Brück, T., and Zwiener, R., 2006. Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union. Journal of Policy Modeling, 28(4), 357-369. doi: http://dx.doi.org/10.1016/j.jpolmod.2006.01.004

Canova, F., and Pappa, E., 2006. The elusive costs and immaterial gains of fiscal constraints. Journal of Public Economics, 90(8-9), 1391-1414. doi: http://dx.doi.org/10.1016/j.jpubeco.2006.01.002

Chatagny, F., 2015. Incentive effects of fiscal rules on the finance minister's behavior: Evidence from revenue projections in Swiss Cantons. European Journal of Political Economy, 39, 184-200. doi: http:/dx.doi.org/10.1016/j.ejpoleco.2015.04.012

Daniel, B. C., and Shiamptanis, C., 2013. Pushing the limit? Fiscal policy in the European Monetary Union. Journal of Economic Dynamics and Control, 37(11), 2307-2321. doi: http://dx.doi.org/10.1016/j.jedc.2013.06.003

Evers, M. P., 2012. Federal fiscal transfer rules in monetary unions. European Economic Review, 56(3), 507-525. doi: http://dx.doi.org/10.1016/j.euroecorev.2011.12.002

Fatás, A., and Mihov, I., 2006. The macroeconomic effects of fiscal rules in the US states. Journal of Public Economics, 90(1-2), 101-117. doi: http://dx.doi.org/10.1016/j.jpubeco.2005.02.005

Ferrero, A., 2009. Fiscal and monetary rules for a currency union. Journal of International Economics, 77(1), 1-10. doi: http://dx.doi.org/10.1016/j.jinteco.2008.09.004

Garcia, C. J., Restrepo, J. E., and Tanner, E., 2011. Fiscal rules in a volatile world: A welfare-based approach. Journal of Policy Modeling, 33(4), 649-676. doi: http://dx.doi.org/10.1016/j.jpolmod.2010.12.009

Hallerberg, M., Strauch, R., and Von Hagen, J., 2007. The design of fiscal rules and forms of governance in European Union countries. European Journal of Political Economy, 23(2), 338-359. doi: http://dx.doi.org/10.1016/j.ejpoleco.2006.11.005

Heinemann, F., Osterloh, S., and Kalb, A., 2014. Sovereign risk premia: The link between fiscal rules and stability culture. Journal of International Money and Finance, 41, 110-127. doi: http://dx.doi.org/10.1016/j.jimonfin.2013.11.002

Iara, A., and Wolff, G. B., 2014. Rules and risk in the Euro area. European Journal of Political Economy, 34, 222-236. doi: http://dx.doi.org/10.1016/j.ejpoleco.2014.02.002

Kumhof, M., and Laxton, D., 2013. Simple fiscal policy rules for small open economies. Journal of International Economics, 91(1), 113-127. doi: http://dx.doi.org/10.1016/j.jinteco.2013.05.002

Pappa, E., and Vassilatos, V., 2007. The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability. European Economic Review, 51(6), 1492-1513. doi: http://dx.doi.org/10.1016/j.euroecorev.2006.10.006

Reicher, C., 2014. A set of estimated fiscal rules for a cross-section of countries: Stabilization and consolidation through which instruments? Journal of Macroeconomics, 42, 184-198. doi: http://dx.doi.org/10.1016/j.jmacro.2014.08.001

Reuter, W. H., 2015. National numerical fiscal rules: Not complied with, but still effective? European Journal of Political Economy, 39, 67-81. doi: http://dx.doi.org/10.1016/j.ejpoleco.2015.04.002

Sacchi, A., and Salotti, S., 2015. The impact of national fiscal rules on the stabilisation function of fiscal policy. European Journal of Political Economy, 37, 1-20. doi: DOI:10.1016/j.ejpoleco.2014.10.003

Von Hagen, J., and Wolff, G. B., 2006. What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU. Journal of Banking & Finance, 30(12), 3259-3279. doi: http://dx.doi.org/10.1016/j.jbankfin.2006.05.011