Effects of Fiscal Rules and Political Framework: Evidence from COVID-19 Crisis

Year 2022, Volume: 7 Issue: 4, 869 - 888, 31.12.2022

Erdem Kılıç , Sıtkı Sönmezer , Orhan Özaydın

https://doi.org/10.30784/epfad.1206600

Abstract

The COVID-19-Crisis impacted economic growth globally, opening up the need for public spending. These conditions put national fiscal authorities under pressure, challenging them primarily to remedy the economic downturn, and secondly to balance fiscal resources. We analyze whether alternative institutional frameworks, fiscal rules and political regimes across numerous countries can explain different economic outcomes following the COVID-19-Crisis. The empirical results show that growth in GDP affects gross debt negatively, government revenue positively, and national savings positively for all subsets, except for the federal subset. The effect on government revenue for fiscal subset is higher than for no fiscal rule. In almost all the subgroup models, it can be observed that the COVID-19 period has a positive effect on gross government debt and a negative on government revenue, except for federal countries and countries with a fiscal rule and a majority government. For all subsets the effect of the COVID-19 variable is not significant in the national savings regression models. For the countries in the federal subset the explanatory variables are unable to reduce the government debt. Conclusively, we could propose adaptive fiscal rules, which motivate fiscal authorities to maintain fiscal balance in long debt and in the annual budget.

Keywords

Fiscal Rules, Fiscal Policy, COVID-19

Mali Kuralların ve Siyasi Yapının Etkileri: COVID-19 Krizinden Kanıtlar

Abstract

COVID-19 krizi, küresel olarak ekonomik büyümeyi etkileyerek kamu harcamalarına duyulan ihtiyacı ortaya çıkardı. Bu koşullar, ulusal mali otoriteleri baskı altına almakta ve onları öncelikle ekonomik gerilemeyi düzeltmeye, diğer yandan da mali kaynakları dengelemeye zorlamaktadır. Bu çalışmada, dünya genelindeki COVID-19 krizinin ardından oluşan farklı ekonomik sonuçların, farklı kurumsal yapılar, mali kurallar ve siyasi rejimler tarafından açıklayıp açıklayamayacağı analiz edilmiştir. Elde edilen ampirik sonuçlar, gayri safi yurtiçi hasıladaki büyümenin federal devlet yapısına sahip ülkeler hariç tüm alt gruplar için brüt borcu olumsuz, hükümet gelirini olumlu ve kamu tasarruflarını olumlu yönde etkilediğini göstermektedir. Mali kural uygulayan devletler için kamu geliri üzerindeki etki, mali kuralın olmadığı duruma göre daha yüksektir. Federal ülkeler, mali kurala sahip ülkeler ve çoğunluk hükümeti olan ülkeler dışında, neredeyse tüm alt grup modellerinde, COVID-19 döneminin kamu brüt borcu üzerinde olumlu ve devlet gelirleri üzerinde olumsuz bir etkiye sahip olduğu gözlemlenmiştir. Tüm alt gruplar için, kamu tasarrufu regresyon modellerinde COVID-19 değişkeninin etkisi anlamlı değildir. Federal yapıya sahip ülkeler için modeldeki açıklayıcı değişkenlerin devlet borcunu azaltamadığı tespit edilmiştir. Sonuç olarak, uzun vadeli borçlarda ve yıllık bütçede mali dengeyi korumaya motive eden uyarlanabilir mali kurallar önerilmektedir.

Keywords

Mali Kural, Maliye Politikası, COVID-19

References

• Aizenman, J. and Marion, N. (2011). Using inflation to erode the US public debt. Journal of Macroeconomics, 33(4), 524-541. https://doi.org/10.1016/j.jmacro.2011.09.001
• Akanbi, O.A. (2015). Fiscal policy and current account in an oil-rich economy: The case of Nigeria. Empirical Economics, 48(4), 1563-1585. https://doi.org/10.1007/s00181-014-0838-2
• Alesina, A. and Perotti, R. (1999). Budget deficits and budget institutions (NBER Working Paper 5556). Retrieved from https://www.nber.org/system/files/chapters/c8021/c8021.pdf
• Ali Abbas, S.M., Belhocine, N., El-Ganainy, A. and Horton, M. (2011). Historical patterns and dynamics of public debt—evidence from a new database. IMF Economic Review, 59(4), 717-742. https://doi.org/10.1057/imfer.2011.24
• Banday, U.J. and Aneja, R. (2019). Twin deficit hypothesis and reverse causality: A case study of China. Palgrave Communications, 5(1), 93. https://doi.org/10.1057/s41599-019-0304-z
• Barkema, J., Gudmundsson, T. and Mrkaic, M. (2020). What do we talk about when we talk about output gaps? (SSRN Working Paper No. 3758093). Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3758093
• Barro, R.J. (1979). On the determination of the public debt. Journal of Political Economy, 87(5-1), 940-971. https://doi.org/10.1086/260807
• Barro, R.J. (1989). The Ricardian approach to budget deficits. Journal of Economic Perspectives, 3(2), 37-54. https://doi.org/10.1257/jep.3.2.37
• Beetsma, R. (2022). The economics of fiscal rules and debt sustainability. Intereconomics, 57(1), 11-15. https://doi.org/10.1007/s10272-022-1021-1
• Blanchard, O., Leandro, A. and Zettelmeyer, J. (2021). Redesigning EU fiscal rules: From rules to standards. Economic Policy, 36(106), 195-236. https://doi.org/10.1093/epolic/eiab003
• Bohn, H. (1998). The behavior of US public debt and deficits. Quarterly Journal of Economics, 113(3), 949-963. https://doi.org/10.1162/003355398555793
• Briceño, H.R. and Perote, J. (2020). Determinants of the public debt in the Eurozone and its sustainability amid the Covid-19 pandemic. Sustainability, 12(16), 6456. https://doi.org/10.3390/su12166456
• Burger, P. and Marinkov, M. (2012). Fiscal rules and regime-dependent fiscal reaction functions: The South African case. OECD Journal on Budgeting, 12(1), 1-29. https://dx.doi.org/10.1787/16812336
• Buti, M. and Giudice, G. (2002). Maastricht’s fiscal rules at ten: an assessment. JCMS: Journal of Common Market Studies, 40(5), 823-848. https://doi.org/10.1111/1468-5965.00399
• Ciccone, R. (2013). Public debt and aggregate demand: Some unconventional analytics. In E.S. Levrero, A. Palumbo and A. Stirati (Eds.), Sraffa and the reconstruction of economic theory: Volume two (pp. 15-43). London: Palgrave Macmillan.
• Davoodi, H.R., Elger, P., Fotiou, A., Garcia-Macia, D., Han, X., Lagerborg, A., Lam, W.R. and Medas, P. (2022). Fiscal rules and fiscal councils (IMF Working Paper No. WP/22/11). Retrieved from https://www.elibrary.imf.org/view/journals/001/2022/011/001.2022.issue-011-en.xml
• Drazen, A. (2004). Fiscal rules from a political economy perspective. In G. Kopits (Ed.), Rules-based fiscal policy in emerging markets (pp. 15-29). London: Palgrave Macmillan.
• Eichengreen, B., El-Ganainy, A., Esteves, R. and Mitchener, K.J. (2019). Public debt through the ages (NBER Working Paper No. 25494). Retrieved from https://www.nber.org/papers/w25494
• Gomez-Gonzalez, J.E., Valencia, O.M. and Sánchez, G.A. (2022). How fiscal rules can reduce sovereign debt default risk. Emerging Markets Review, 50, 100839. https://doi.org/10.1016/j.ememar.2021.100839
• Greene, W.H. (2012). Econometric analysis (7. Ed.). Boston: Pearson International Edition.
• Hutchison, M.M. (2020). The global pandemic, policy space and fiscal rules to achieve stronger stabilization policies. Seoul Journal of Economics, 33(3), 309-331. https://doi.org/10.22904/sje.2020.33.3.003
• IMF. (2021a). Fiscal monitor 2021 [Dataset]. Retrieved from https://www.imf.org/external/datamapper/datasets/FM
• IMF. (2021b). Policy responses to COVID-19 [Dataset]. Retrieved from https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19
• IMF. (2021c). World economic outlook database 2021 [Dataset]. Retrieved from https://www.imf.org/en/Publications/WEO
• James, G., Witten, D., Hastie, T. and Tibshirani, R. (2021). An introduction to statistical learning (2. Ed.). New York: Springer.
• Kayhan, S., Bayat, T. and Yüzbaşı, B. (2013). Government expenditures and trade deficits in Turkey: Time domain and frequency domain analyses. Economic Modelling, 35, 153-158. http://dx.doi.org/10.1016/j.econmod.2013.06.022
• Kell, M. (2001). An assessment of fiscal rules in the United Kingdom (IMF Working Paper No. WP/01/91). Retrieved from https://www.imf.org/external/pubs/ft/wp/2001/wp0191.pdf
• Kopits, M.G. and Symansky, M.S.A. (1998). Fiscal policy rules (1. Ed.). International Monetary Fund.
• Ostry, M.J.D., Ghosh, M.A.R. and Espinoza, M.R.A. (2015). When should public debt be reduced? (IMF Staff Discussion Notes, SDN/15/10). https://doi.org/10.5089/9781498379205.006
• Roth, C., Settele, S. and Wohlfart, J. (2022). Beliefs about public debt and the demand for government spending. Journal of Econometrics, 231(1), 165-187. https://doi.org/10.1016/j.jeconom.2020.09.011
• Siebrits, F.K. and Calitz, E. (2004). Should South Africa adopt numerical fiscal rules? South African Journal of Economics, 72(4), 759-783. https://doi.org/10.1111/j.1813-6982.2004.tb00133.x
• Stalder, I. (1992). Staatsverschuldung aus der Sicht der neuen politischen Ökonomie (2. Ed.). Nürnberg: Forum Finanzwissenschaften.
• Tanner, E. (2004). Fiscal rules and countercyclical policy: Frank Ramsey meets Gramm–Rudman–Hollings. Journal of Policy Modeling, 26(6), 719-731. https://doi.org/10.1016/j.jpolmod.2004.04.015
• Von Weizsäcker, C.C. (2014). Public debt and price stability. German Economic Review, 15(1), 42-61. https://doi.org/10.1111/geer.12030
• Woo, J. and Kumar, M.S. (2015). Public debt and growth. Economica, 82(328), 705-739. https://doi.org/10.1111/ecca.12138