New research into the drivers behind political budget cycles suggests a link with changes in fiscal rules and several important factors for onward analysis.
A working paper on the causal effect of fiscal rules on political budget cycles analyses geographical patterns in adoption of fiscal rules to determine key factors.
"We find that in election years with fiscal rules in place, public consumption is reduced by 1.65% point of GDP as compared to election years without these rules. This impact is equivalent to a reduction by a third of the volatility of public consumption in our sample," Kodjovi M. Eklou, IMF researcher, notes.
Based on a sample of 67 developing countries over the period 1985–2007, the research further highlights dependencies on type, institutional design, timeframe and degree of competitiveness of elections
"Based on a diffusion argument, we use the number of other countries in a given subregion that have fiscal rules in place to predict the probability of having them at the country level," Eklou adds.
Results suggest that escape clauses should be well defined in order to avoid changing or amending too often fiscal rules and thus undermining their credibility in the long run. Findings also have interesting implications regarding the design of fiscal rules in increasingly decentralized developing countries.
"Our empirical analysis provides a novel, robust identification strategy in order to estimate the causal effect of fiscal rules. Using a sample of developing countries, we find that fiscal rules matter for fiscal discipline. In addition, some specific features of fiscal rules are particularly relevant to achieve fiscal discipline: Expenditure rules, rules targeting all levels of government and rules that are monitored by an independent body outside the government lead to fiscal discipline over the electoral cycle. Furthermore, we also find that fiscal rules are more effective in constraining political budget cycles the longer they are in place," Eklou comments.
Read this working paper in full: http://www.imf.org/external/pubs/cat/longres.aspx?sk=48882
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