The Impact of Fiscal Rules on Fiscal Policy Volatility

Abstract

In this paper, we study the impact of fiscal rules, in the form of explicit deficit or debt constraints, on fiscal policy volatility. The main motivation behind this research is, on the one hand, a negative and robust correlation of fiscal policy volatility and long run growth documented in several papers and, on the other, the relatively small number of works that discuss possible determinants of the former. We argue that fiscal rules have a significant impact on fiscal policy volatility, but depending on the target of the rule—public debt or fiscal balance—rules will increase or decrease policy volatility. This result is novel, and, to the best of our knowledge, has not been discussed in the literature.