PhD-Project: Fiscal Rules

PhD Project – Fiscal Rules – Christoph Paetz (IMK, University Duisburg-Essen, New School of Social Research, IPE)
Supervisors: Prof. Dr. Achim Truger, HWR Berlin; Prof. Dr. Till van Treeck, Universität Duisburg-Essen

General research question:
“Is rule-based fiscal policy generally an useful instrument and which designs have been proven to be efficient and appropriate to the objectives?"


Since the early 1990s there has been an increasing trend towards rule-based fiscal policy (Alesina and Perotti 1995, Kopits 2001, Kumar et al. 2009) due to continuous budget deficits in most industrialized countries during the 1970s and 1980s and the associated increase in public debt. The aim is to limit the activity of the government via fiscal discipline (Bofinger 2014; No. 652). The theoretical background in this regard comes from the majority of modern macroeconomic models in which fiscal policy has suffered a significant loss of importance and has been downgraded to the provision of the institutional basis, while at the same time monetary policy takes over as the instrument for real stabilisation of the economy (Arestis 2009, Dullien 2012). Against this background there is research required because of two developments.

First, due to new theoretical and empirical results. Since the financial crisis of 2008/09, the above mentioned models have been fundamentally criticised. However, the importance of fiscal policy in macroeconomic models has already slightly risen before the financial crisis by the implementation of non-ricardian agents (Galí et al. 2007, Kumhof and Laxton 2007). In addition, one has to consider the current debate on the size of fiscal multipliers. The new findings in the empirical literature on the macroeconomic effects of fiscal policy show that multipliers and therefore the impact on production have been significantly underestimated in the past (IMF 2014, Bouthevillian et al. 2009, Boussard et al. 2012, Gechert and Rannenberg 2014).

Second, it is possible to draw on a significant amount of long-term experiences with fiscal rules since the beginning of its implementations until today (Wyplosz 2011). Moreover, the sample period includes a deep recession with the financial and economic crisis. The fact that fiscal rules represent a useful tool to contain deficits in a boom phase speaks for them. However, the general problems and risks of rule-based fiscal policy in recessionary times should not be ignored.

In light of recent theoretical and empirical results, as well as experience gained in practice with rule-based fiscal policy, the functionality of fiscal rules in general and their design in particular will be examined in this dissertation. Therefore they will be evaluated according to several success criteria, such as the sustainable stabilisation of debt levels or the macroeconomic performance, but also the elimination of macroeconomic imbalances. Specifically, it is about whether fiscal policy has become more pro- or countercyclical by the respective fiscal rule? What is the cyclical response in short, medium or long-term recessions? How do the respective institutions calculate the cyclical adjustment of their budget? Following the debate on fiscal multipliers also raises the question of how fiscal rules affect output and public investment. A strong limitation of public investment would neglect their long-term growth effects (IMF 2014b, Ch. 3). Thus, with regard to strong macroeconomic imbalances the question arises of who fills-in growing demand gaps and potentially present investment gaps in times of strict restrictions by fiscal rules and increasing private surpluses?