Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability prepared by Luc Eyraud, Xavier Debrun, Andrew Hodge, Victor Lledó, and Catherine Pattillo published by IMF (4/2018).
“Fiscal rules are widely used to constrain fiscal policy discretion and promote fiscal discipline. More than 90 countries are using fiscal rules today. Their main goals are to commit policymakers to fiscal sustainability, enhance transparency, and signal to financial markets the course of fiscal policy. Rules can also have a political function by catalyzing broad agreements on sound fiscal strategies. Despite their widespread use, rules have been criticized for being too rigid and complicated. A poor track record of compliance has also raised questions about their effectiveness.
This paper presents new evidence that well-designed rules are indeed effective in constraining excessive deficits. Country experiences show that successful rules generally have broad institutional coverage, are tightly linked to fiscal sustainability objectives, are easy to understand and monitor, and support countercyclical fiscal policy. Supporting institutions, like fiscal councils, are also important. In contrast, rules that are poorly designed and do not align well with country circumstances can be counterproductive. Novel empirical research finds that fiscal rules can reduce the deficit bias even when they are not complied with…”
Fiscal Rules: Make them Easy to Love and Hard to Cheat by Xavier Debrun, Luc Eyraud, Andrew Hodge, Victor Lledo, Catherine Pattillo, Abdelhak Senhadji published by IMF (4/2021)
Rules to contain lavish government deficits are most effective if countries design them to be simple, flexible, and enforceable in the face of changing economic circumstances.
In new analysis, we look at fiscal rules in over 90 countries and, based on their experiences, find that the rules put in the place over the last three decades often were too complex, overly rigid, and difficult to enforce…”
