DP19980 Dynamic Effects of Fiscal Rules: Do Initial Conditions Matter?
Fiscal rules have been shown to support fiscal discipline by improving government budget balances and restraining debt growth. However, questions remain about what enhances their effectiveness and how certain conditions help build the credibility needed for their survival and success. Using data from 108 countries between 1984 and 2012, we study the dynamic effects of fiscal rule adoption. We show that while fiscal rules generally improve the primary balance, their effects depend on the time horizon under consideration and the context of adoption. In advanced economies and countries with strong political institutions, the effects strengthen over time. Conversely, in emerging market and developing economies—especially those with weaker institutions—their impact tends to fade as time passes. Our findings highlight the critical role of economic conditions and consensus building at the time of adoption. Specifically, fiscal rules introduced in times of economic hardship or under highly concentrated political power are often less effective in the medium term.
