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Committed to Flexible Fiscal Rules

Author

Listed:
  • Chistoph Grosse-Steffen
  • Laura Pagenhardt
  • Malte Rieth
Abstract
We study the impact of fiscal rules on macroeconomic performance. To address the endogeneity of rule adoption, we use data on large, random natural disasters. We document empirically that countries with rules perform significantly better following such exogenous shocks than countries without rules. GDP and private consumption are persistently higher. This is associated with more expansionary fiscal policy and hinges on the existence of fiscal space and escape clauses. We rationalize the findings in a model of sovereign default, which replicates the empirical dynamics and shows that tight rules create fiscal space in good times for deficit-spending in bad times.

Suggested Citation

  • Chistoph Grosse-Steffen & Laura Pagenhardt & Malte Rieth, 2021. "Committed to Flexible Fiscal Rules," Working papers 854, Banque de France.
    • Handle: RePEc:bfr:banfra:854
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    References listed on IDEAS

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    2. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Do Fiscal Rules Undermine Public Investments? A Review of Empirical Evidence," ifo Working Paper Series 393, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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    More about this item

    Keywords

    Fiscal Policy; Fiscal Regimes; Natural Disasters; Sovereign Default Model; Panel Data;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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