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The paper shows that common fiscal rules, such as a limit to the deficit-output ratio, induce an “escape clause”-type fiscal policy, similar to that studied for monetary policy by Flood and Isard (1988 and 1989) and Lohmann (1992): The government resorts to an active stabilization (for example, countercyclical) policy only during “exceptional times” by running deficits in recession phases and surpluses during economic booms. In contrast, it optimally chooses a procyclical policy in intermediate states of the economy, for example, by raising the budget deficit when output improves. Because the optimal fiscal reaction function in the presence of fiscal rules is not monotonous in output, the standard estimates that assume linearity are prone to a serious bias, and the conclusions on the pro- or countercyclical properties of fiscal policy found in the literature are likely to be unreliable.


Use of government revenue and expenditure powers to promote stability is a principle that gained popular acceptance slowly in the Federal Republic of Germany. However, a considerable change of attitude took place during the 1960s, and fiscal thinking has become much more activist-oriented. The Stabilization Law of 1967 obligates the Federal Government and the states to “observe the requirements of overall economic equilibrium in their economic and fiscal measures.”1 The Act arms the Federal Government with a wide variety of discretionary fiscal powers. Included among these are surcharges on individual and corporate income, authority to adjust an investment tax credit and to alter depreciation rules, and authority to force postponement of the public investment projects of the lower levels of government.

Ms. Laura Wallace

For policymakers around the world, finding ways to promote faster growth is a top priority. But what exactly do economists know and not know about growth? What direction should future research and policymaking take? This issue explores this topic, starting with a major World Bank study and research coming out of Harvard University that urges less reliance on simple formulas and the elusive search for best practices, and greater reliance on deeper economic analysis to identify each country's binding constraint(s) on growth. Other articles highlight IMF research on pinpointing effective levers for growth in developing countries and Africa's experience with growth accelerations. Also in the issue are pieces examining global economic imbalances, rapid credit growth in Eastern and Central Europe, and ways to boost productivity growth in Europe and Japan. In Straight Talk, Raghuram Rajan argues that if we want microfinance to become more than a fad, it has to follow the clear and unsentimental path of adding value and making money. Asian Development Bank's Haruhiko Kuroda sets out his vision for a new financial architecture in Asia. Finally, Picture This takes an in-depth look at global employment trends.

Daryl A. Dixon

THE FULL EMPLOYMENT BUDGET SURPLUS CONCEPT, which has been developed almost exclusively in the United States, originates from a proposal made in 1947 by the Committee for Economic Development that the budget be designed to “yield a moderate surplus at high-employment national income.”2 The concept found favor during the early 1960s, and the Annual Reports of the Council of Economic Advisers for 1964 and 1965 analyzed the budget program in terms of the full employment surplus. For the next few years the concept drew little official attention, but the present Administration has recently made use of the concept. In particular, the President stated in his Budget Message for 1972:

International Monetary Fund

The 2005 Article IV Consultation for the United States reports that robust productivity growth and high corporate profits have contributed to a strong rebound in business investment and some acceleration in employment. The financial sector appears well positioned to provide continued support to the recovery. Equity prices have risen, long-term interest rates remain low, banks are well capitalized and highly profitable, and indicators of credit quality remain strong. The robust housing market has caused financial regulators to tighten oversight of home equity and other residential loans.

International Monetary Fund

This 2009 Article IV Consultation highlights that Iraq’s longer-term economic outlook is strong as oil prices and production are projected to increase markedly in the coming years. However, based on conservative oil price assumptions, the external current account and the overall balance of payments are expected to remain in deficit in 2010 and 2011. Similarly, Iraq’s fiscal position is projected to record significant, albeit declining deficits in both years, before returning to a surplus position in 2012.

International Monetary Fund
This 2002 Article IV Consultation highlights that the United States economy slipped into recession in early 2001, as industrial production dropped sharply, investment and exports declined, and employment and weekly hours fell. The downturn was triggered in part by the collapse of the Information Technology boom and stock prices in March 2000, but was further exacerbated by the September 11th terrorist attacks. As a result, following real GDP growth in excess of 4 percent during the previous four years, the economy slowed sharply in 2001.
International Monetary Fund
This Selected Issues paper provides a quantitative assessment of the determinants of inflation in Slovenia, and evaluates the likelihood of the Maastricht inflation criterion being met. It concludes that on the basis of currently identified policies, Slovene inflation will likely remain above the Maastricht criterion over the assessment period. The IMF staff analysis suggests that the economic slowdown related to the unfavorable external environment contributed about two-thirds to disinflation in 2003. This paper also analyzes the direct fiscal implications of European Union accession on Slovenia.
International Monetary Fund
This Selected Issues paper on Sweden analyzes possible adjustments to the fiscal framework that the authorities may wish to consider. The paper starts with a brief description of Sweden’s fiscal framework, followed by an assessment of the framework’s strengths and weaknesses. The scope for stabilization policy in Sweden is analyzed. The paper describes the Johansson commission’s recommendations and puts forth alternative options. A strategy that would entail marginal adjustments to the framework is also proposed.
International Monetary Fund
This Selected Issues paper analyzes the conduct of fiscal policy in Spain, made topical by the entry into effect of the Budgetary Stability Law in 2003. This law, along with the new permanent financing arrangements with the subnational levels of government, provides a new institutional and legal framework for fiscal policy. These innovations aim to lock in the gains in fiscal consolidation represented by the achievement of the goals of the Stability and Growth Pact in 2001.