THE CREDIBILITY OF FISCAL RULES POLICY AND BUSINESS CYCLE VOLATILITY

Haryo Kuncoro

Abstract


This aim of this paper is two-fold; first, it studies the impact of fiscal rule policy credibility on output growth stability; second, it compares to discretionary as well as automatic stabilizer fiscal policy. Employing quarterly data over the period 2001-2013 in the case of Indonesia, we obtain that the credible debt rule leads to decrease the volatility of output growth while the incredible deficit rule does not have any effect. Both unsystematic and systematic components of discretionary fiscal policy have a stabilizing function. Interestingly, the automatic stabilization tends to induce the output growth volatility. Given those results, we infer that government spending is not a good automatic stabilizer. It seems that the lower ratio of government expenditure to GDP along with improving credibility of deficit rule policy has a smoother effect on the economy. Therefore, they implicitly support expenditure cuts in implementing fiscal adjustment in order to reach fiscal sustainability in the short-run and stable economic growth in the long-run.

Keywords


output growth volatility, credible fiscal policy, government size, openness

JEL Codes


E32, E62,

Full Text:

PDF

References


Abdurohman, 2013. The behavior of fiscal policy in Indonesia in response to economic cycle: a comparison with other ASEAN countries, paper presented in the 23rd PRSCO and the 4th IRSA Institute, July, 2-4, Bandung.

Afonso A. and Jalles, J.T., 2013. Do fiscal rules matter for growth?, Applied Economics Letters, 20(1), 34-40, DOI: 10.1080/13504851.2012.674198.

Aizenman, J. and Marion, N., 1999. Volatility and investment: interpreting evidence from developing countries, Economica, 66, 157-79.

Akitoby, B., Clements, B. Gupta, S. and Inchauste, G., 2006. Public spending, voracity, and Wagner's law in developing countries, European Journal of Political Economy, 22(4), 908–24, DOI: 10.1016/j.ejpoleco.2005.12.001.

Alesina, A., Campante, F.R. and Tabellini, G., 2008. Why is fiscal policy often procyclical?, Journal of the European Economic Association, 6(5), 1006–36, DOI: 10.1162/ JEEA.2008.6.5.1006.

Annett, A., 2006. Enforcement and the stability and growth pact: how fiscal policy did and did not change under Europe's fiscal framework, IMF Working Paper Series WP/05/16.

Baldacci, E., 2009. Neither sailing against the wind, nor going with the flow: cyclicality of fiscal policy in Indonesia, IMF Country Report No. 09/231.

Barlevy, G., 2004. The costs of business cycles under endogenous growth, American Economic Review, 94(4), 964–90.

Basri, M.C. and Rahardja, S., 2011. Mild crisis, half hearted fiscal stimulus: Indonesia during the GFC, in T. Ito and F. Parulian, (edt.), Assessment on the Impact of Stimulus, Fiscal Transparency and Fiscal Risk, ERIA Research Project Report 2010-01, 169-211.

Blöndal, J.R., Hawkesworth, I. and Choi, H., 2009. Budgeting in Indonesia, OECD Journal on Budgeting, 2009/2.

Crespo-Cuaresma, J., Reitschuler, G. and Silgoner, M., 2011. On the effectiveness and limits of fiscal stabilizers, Applied Economics, 43(9), 1079-86.

Debrun X. and Kapoor, R., 2010. Fiscal policy and macroeconomic stability: automatic stabilizers work, always and everywhere, IMF Working Paper, WP/10/111, May.

Doraisami, A., 2013. Fiscal policy challenges in developing countries, the Indonesian experience in responding to the global financial crisis, Journal of Southeast Asian Economies, 30(3), 322–33.

Dutt, P. and Mitra, D., 2008. Inequality and the instability of polity and policy, Economic Journal, 118, 1285-314, DOI: 10.1111/j.1468-0297.2008.02170.x.

Fatas, A. and Mihov, I. 2001. Government size and automatic stabilizers: international and intranational evidence, Journal of International Economics, 55(1), 3-28.

Fatás, A. and Mihov, I., 2003. The case for restricting fiscal policy discretion, Quarterly Journal of Economics, 118(4), 1419-47.

Fatás, A. and Mihov, I., 2006. The macroeconomic effects of fiscal rules in the US states, Journal of Public Economics, 90(1-2), 101-17.

Fountas, S. and Karanasos, M., 2007. Inflation, output growth, and nominal and real uncertainty: empirical evidence for the G7, Journal of International Money and Finance, 26(2), 229-50.

Furceri, D., 2009. Fiscal convergence, business cycle volatility, and growth, OECD Economics Department Working Papers, No. 674, OECD Publishing, http://dx.doi.org/

1787/226475824848.

Galí, J., 1994. Government size and macroeconomic stability, European Economic Review, 38(1), 117–32.

Galí, J. and Perotti, R., 2003. Fiscal policy and monetary integration in Europe, Economic Policy, 18, 533-72.

Giovanni, J.D. and Levchenko, A.A., 2009. Trade openness and volatility, Review of Economics and Statistics, 91(3), 558-85.

Hur, S., Mallick, S., and Park, D., 2010. Fiscal policy and crowding out in developing Asia, ADB Economics Working Paper Series, No. 222, September.

Imbs, J., 2007. Volatility and growth, Journal of Monetary Economics, 54, 1848-62.

Kaminsky, G., Reinhardt, C. and Végh, C., 2004. When it rains, it pours: pro-cyclical capital flows and macroeconomic policies, NBER Macroeconomics Annual, Cambridge and London: MIT Press.

Karras, G. and Song, F., 1996. Sources of business-cycle volatility: an exploratory study on a sample of OECD countries, Journal of Macroeconomics, 18, 621-37.

Kopits, G., 2001. Fiscal rules: useful policy framework or unnecessary ornaments?, IMF Working Paper WP/01/145.

Kuncoro, H., 2014. Does the credible fiscal policy reduce its volatility? the case of Indonesia, Journal of Applied Economic Sciences, 9(29), 382-93.

Lane, P.R., 2003. The cyclical behavior of fiscal policy: evidence from the OECD, Journal of Public Economics, 87(12), 2661-75, DOI: 10.1016/S0047-2727(02)00075-0.

Malik, A. and Temple, J., 2009. The geography of output volatility, Journal of Development Economics, 90, 163-78.

Mohanty, M.S. and Zampolli, F., 2009. Government size and macroeconomic stability, BIS Quarterly Review, 55-68.

Naert, F., 2011. Credibility of fiscal policies and independent fiscal bodies, Review of Business and Economic Literature, 56(3), 288-309.

Perotti, R., 2005. Estimating the effects of fiscal policy in OECD countries, Proceedings, Federal Reserve Bank of San Francisco, March

Pina, A.M. and Venes, N.M., 2011. The political economy of EDP fiscal forecasts: an empirical assessment, European Journal of Political Economy, 27(3), 534-46.

Ramey, G. and Ramey, V.A., 1995. Cross-country evidence on the link between volatility and growth, American Economic Review, 85(5), 1138-51.

Sacchi, A. and Salotti, S., 2014. The impact of national fiscal rules on the stabilization function of fiscal policy, MPRA Working Paper No. 56982, University Library of Munich, Germany.

Surjaningsih, N., Utari, G.A.D. and Trisnanto, B., 2012. The impact of fiscal policy on the output and inflation, Bulletin of Monetary Economics and Banking, 14(4), 367-96.

Woo, J., 2006. The political economy of fiscal policy: public deficits, volatility, and growth, Lecture Notes in Economics and Mathematical Systems, 570, Berlin: Springer-Verlag.




DOI: http://dx.doi.org/10.1515/aicue-2016-0017

Refbacks

  • There are currently no refbacks.