- George Kopits, and Steven Symansky
- Published Date:
- July 1998
This appendix surveys existing and proposed constraints on fiscal policy that can be defined as fiscal policy rules (see Section I).85
Probably the best known fiscal policy rules are those involving balance between government revenue and expenditure. This can be specified as the overall balance, the current balance, or the operating balance to be met each fiscal year. Alternatively, it can be defined over a longer period, in terms of a structural balance or a cyclically adjusted balance.
In the postwar period, in several industrial countries, governments were subject to various balanced-budget rules. In Germany, Japan, and the Netherlands, the rule was defined in terms of the current balance—government limited to borrowing capital expenditures only—commonly called the “golden rule.”86 Subsequently, in the Netherlands, the government was committed to a structural deficit ceiling. Among developing countries, Brazil‘s balanced-budget requirement applies only to the central government, although certain forms of borrowing are treated as revenue.
According to the Maastricht Treaty, members of the European Union wishing to participate in Stage 3 of EMU (monetary unification, effective 1999) are required to contain their general government deficit at a level not in excess of 3 percent of GDP by 1997, following a convergence plan under way since 1992. In addition, the Stability and Growth Pact calls for “a medium-term budgetary position close to balance or surplus,” subject to the 3 percentage point reference value for the deficit in any year, so as to “allow for automatic stabilizers to work, where appropriate, over the whole business cycle.”87 Largely accrual-based recording standards have been issued for this purpose, under the so-called excessive deficit procedure,88 and compliance with this requirement will be verified ex post, after the end of the calendar year.
In New Zealand, the authorities are required to ensure that once a prudent public debt-GDP ratio (see below) is reached, it is maintained, on average, over a reasonable period of time, through balance between operating expenditure and revenue of the public sector.89 The requirement allows for short-term cyclical deviations—albeit without specifying whether due only to automatic stabilizers or to discretionary actions as well—from the balanced-budget position. Furthermore, tax rates are required to remain stable over time, implying that the adjustment should take place on the expenditure side.
In Switzerland, the authorities have proposed constitutional amendments whereby the federal government finances would be balanced over the business cycle. The balanced-budget amendment would become effective in 2001, at which time the authorities would have achieved balance.90 It is understood that the lower levels of government would cooperate in such an endeavor in order to halt the increase in the public debt-GDP ratio. In the United States, the balanced-budget amendment to the constitution, proposed on several occasions (in 1982, 1995, 1997) but so far rejected, would require the government to balance the federal budget each fiscal year. The rule could be waived only by a three-fifths majority of each house of Congress or in the case of an armed conflict or a threat to national security. The rule thus precludes both an explicit role for automatic stabilizers and concrete guidelines on how the rule is to be met.
A similar constitutional amendment is under consideration in Costa Rica. Intended for implementation by 1999, this amendment would limit the overall deficit to 1 percent of GDP or less. Coverage of the rule would extend to the entire public sector, including the public financial institutions, to capture sizable quasi-fiscal activities. Although details of implementation remain to be worked out, it is clear that a consensus has emerged to end the politically induced fluctuations in fiscal performance that have characterized Costa Rican public finances for more than two decades.
Among countries with federal systems, sub-national levels of government in Germany and in the United States are subject to the so-called golden rule: current revenue and current spending must balance each fiscal year. Nonbank borrowing is permitted to finance investment projects under certain well-defined conditions. In Germany, most Lander are subject, in principle, to the golden rule. In practice, however, there has been considerable latitude in defining current and capital expenditures. Moreover, the rule is applied to the approval of the budget rather than to the execution. In the United States, all state governments (with the exception of Vermont) follow the current balanced-budget rule under varying degrees of stringency. Whereas in certain U.S. states it is sufficient to enact a balanced budget, in others it is also necessary to implement it. A number of states do not permit carryover of unspent appropriations or of payables from one fiscal year to the next to meet the rule. Some states prescribe the creation and utilization of contingency reserves, and most states impose various kinds of limits on the amounts and types of debt that may be issued.
More recently, also at the subnational level, in Canada, six provincial governments (Alberta, Manitoba, New Brunswick, Nova Scotia, Quebec, and Saskatchewan) and two territories (Northwest and Yukon) have enacted balanced-budget rules. They range in stringency from requiring actual overall balance or limiting deficits (equivalent to 1 percent of expenditures or revenues) each year to prescribing current balance over a four- or five-year period. Escape clauses, permitting deficits, can be invoked in the event of an emergency or disaster (or in one case, a significant revenue fall beyond the control of the authorities). Some governments are required to observe the rule only on an ex ante basis; for others, the obligation extends to realized budget outcomes as well.
Some of the oldest functioning fiscal rules consist of prohibition of or limits on government borrowing. The borrowing constraint usually specifies the source of financing (central bank or all domestic sources) and the level of government (national or subnational) to which it applies.
Most of the advanced economies and some developing economies prohibit direct central bank financing of the general government as well as the rest of the nonfinancial public sector. Under the Maastricht Treaty, such a rule went into effect at the beginning of Stage 2 for all EU member countries participating in EMU. Normally, this rule leaves the extension of short-term advances to the government to the discretion of the central bank, as evidence of the bank‘s independence. The rule is somewhat less commonly found in developing countries and economies in transition.91 Under a strict variant, in Chile and Ecuador, both direct and indirect access to central bank credit is prohibited. Instead of outright prohibition, in some developing and transition economies (in the CFA franc zone, Brazil, Egypt, Morocco, the Philippines, and the Slovak Republic), central bank credit is limited to a proportion (usually between 5 and 20 percent) of government revenue in the preceding year.92
Perhaps a better known rule prohibiting domestic government borrowing operates in Indonesia, having been introduced in the mid-1960s in the wake of an external payments crisis and high inflation. The coverage excludes certain off-budget operations, particularly those financed with oil export receipts or borrowing from abroad.
In many countries, there are limits on borrowing by lower levels of government.93 In a number of them, borrowing is at most permitted for investment (Germany, Switzerland, and the United States) or as a proportion of revenue (Canada) or expenditure (Korea). In some developing countries (The Bahamas and Chile), borrowing by subnational governments is not permitted; in others (Mexico), the restriction applies only to external borrowing. Recently, in some economies in transition (Albania, Bulgaria, Poland, and Romania), borrowing prohibitions have been imposed in the face of weak overall institutional controls on local government finances.
A fiscal policy rule may consist of a limit on, or a target for, the stock of public debt as a proportion of GDP. At present, under a broad definition, the following two cases can be considered rules.
In the European Union, the Maastricht Treaty calls for a ceiling on the general government gross debt, set at a reference value of 60 percent of GDP, for participation in EMU. However, there is room for interpretation, especially in determining whether a country is making sufficient progress toward the reference value. The ceiling permits using privatization revenue for gross debt reduction—even though such an operation leaves net worth, with properly valued assets, unchanged. Furthermore, excluded from the debt ceiling are publicly guaranteed liabilities contracted by the rest of the public sector or the private sector, accrued liabilities under government pension schemes, and other contingent liabilities, including unfunded social security obligations for future pensions and health care benefits.
In New Zealand, the authorities are required to announce a medium-term plan for reducing the public debt ratio to a prudent level.94 Accordingly, the previous government declared its commitment to reduce the net public debt to 20 percent of GDP in the medium term, as well as to maintain an adequate level of public sector net worth so as to provide a buffer against future unanticipated adverse developments. Coverage of the net worth component of the target extends to all outstanding liabilities, including the net actuarial value of government employee pensions under defined-benefit schemes and other quantifiable contingent liabilities and commitments, though excluding unfunded liabilities associated with public pension programs and other nonquantifiable liabilities. In Canada, as part of balanced-budget legislation, three provinces have imposed debt-reduction requirements. These provisions are specified in terms of an explicit target (Alberta) or are to be determined by the government within broad guidelines (New Brunswick and Quebec).
In some ways analogous to a debt rule, a fiscal rule may prescribe a target accumulation of reserves (presumably in terms of liquid assets) for a future contingency. The contingency may take the form of old-age protection, insurance for depletion of a natural resource, or insurance against an unanticipated fall in key commodity prices. Such a rule is usually limited to a target contingency reserve ratio, in the context of an extrabudgetary fund.
To provide minimum funding for future pension claims in the United States, the social security trust funds (Old-Age, Survivors‘ and Disability Insurance, or OASDI) are targeted to accumulate contingency reserves equivalent to 100–150 percent of annual benefit payments. According to recent projections, this threshold reserve-benefit ratio is forecast to be maintained only until about 2025, unless changes in benefits or payroll contribution rates are made. In Canada, the Canadian Pension Plan is required to reach and maintain an annual reserve-benefit ratio of at least 200 percent. Under a new financing plan, the ratio is projected to increase to 500 percent over the long term. In Germany, the public pension reserve must maintain at least one month of benefits.
Instead of setting a minimum or target level of reserves, Chile‘s Copper Compensation Fund is required to accumulate excess revenue from copper exports, as a function of the difference between a medium-term reference price (determined by a six-year moving average of the export price) and the current export price of copper, and of various other factors. In the event of negative price differentials, transfers are usually made from the fund‘s reserves to the budget.
Implicit fiscal policy rules can be broadly derived from monetary or exchange rate rules. Perhaps the most common rule is a fixed nominal exchange rate—and, to a lesser extent, a preannounced crawling peg—which requires that the budget be kept close to balance, particularly given a fully open capital account and an undeveloped government securities market. Many IMF member countries—under the Bretton Woods system, the entire membership—have been, or currently are, relying on such an exchange rate rule, which imposes a high degree of fiscal discipline. However, the experience of Mexico, which until end-1994 held on to a preannounced crawling peg, illustrates that even a nearly balanced budget may not be sufficient to ensure the sustain-ability of a strict exchange rate rule when it becomes overvalued.
Much less frequent is a currency board arrangement,95 which permits, in principle, government borrowing from the domestic banking system in addition to external and domestic nonbank sources but only at a high cost in terms of the crowding out of private activity, as the monetary expansion must be backed by foreign exchange inflows. Accordingly, in Argentina and Estonia, under recently established currency board arrangements, public finances (inclusive of privatization receipts) are to be kept close to balance, given limited access to alternative (domestic nonbank and external) sources of finance.
Specialized fiscal rules—not the main focus of this paper—applied to certain categories of government revenue or expenditure have their own rationale. A limitation, for example, on primary expenditure at constant prices or on the share of primary expenditure to GDP is usually driven by an effort to contain or reduce the size of government in the economy.96 Rules requiring the earmarking of revenue for particular purposes or mandating a certain composition of expenditures over time (such as limiting defense outlays) are usually predicated on microeconomic grounds and may be difficult to maintain over an extended period.
Although rules on the composition of tax revenue or of primary expenditure may be arbitrary or inconsistent with rules encompassing aggregates, their adoption is justified in certain circumstances. Rules requiring balance between complementary outlays, for instance, on primary and secondary education—or between current (operations and maintenance) and capital expenditures on health care facilities or on highways—have a clear economic justification. The earmarking of certain user charges for the provision of specific services (for example, toll roads) or of payroll contributions for specific social insurance funds can be useful in creating both support and accountability for such programs. Rules on minimum tax rates—for example, value-added tax rates within the EU—within a federal or confederate context may be necessary to prevent undesirable tax competition among jurisdictions. In addition, explicit revenue-sharing arrangements—including apportionment rules for the corporate income tax base among subnational jurisdictions—or formula-based equalization transfers among different levels of government are intended as a distributive instrument among different tax jurisdictions.
An important rationale for fiscal policy rules is the elimination of the deficit bias experienced in many countries over the last two decades or so. This appendix summarizes the theoretical context and empirical findings as regards the effects of fiscal retrenchment on interest rates and growth, which are of particular relevance in ascertaining the likely consequences of fiscal rules.
At an elementary level, a hypothetical increase in government saving, in the form of reduced government purchases or lower disposable income (from higher taxes or reduced transfers), has a negative direct effect on aggregate demand. An ex ante increase in government saving leads to an increase in national saving, lower interest rates, a crowding in of private investment, and higher output in the long run.97 As fiscal rules are expected to mitigate or remove the deficit bias inherent in the fiscal policy of the industrial countries, it is useful to examine existing empirical estimates of the macroeconomic consequences of fiscal retrenchment.
There are several factors that determine the quantity and quality of these effects, as reflected in fiscal multipliers, including monetary and exchange rate policy, openness of the economy, the form of fiscal adjustment (that is, government consumption, transfers, and taxes), and exogenous credibility effects that alter the risk of default. Standard Keynesian models with backward-looking expectations, developed in the 1970s, yield negative short-run effects, with multipliers often greater than 2 that last several years.98 In more recently developed models that incorporate intertemporal budget constraints and rational expectations, fiscal multipliers reflect various (often opposite) effects (Table 3). Although the negative direct demand effect is still present, the total effect critically depends on the expectation of future policy action. If fiscal adjustment is perceived as permanent, expected increases in future output, as well as expected declines in future interest rates and tax rates, tend to encourage present investment and consumption, while mitigating the withdrawal of demand. For the same fiscal shock, the multiplier can exhibit substantial variation (between negative and positive values), depending on expectations regarding the future course of policy. In general, multipliers tend to be smaller if the fiscal policy adjustment is gradual but credible. The positive credibility effects of a continuous fiscal reduction (lower long-term interest rates and higher future income growth) are anticipated and thus realized today. These points have been illustrated by two recent fiscal simulations for Germany and the United States in the context of the IMF‘s MULTIMOD model.99
|(Normalized to I percent of GDP)|
|Expenditure Increase||Tax Decline|
|Author||Simulation||Short term||Long term||Short term||Long term|
|IMF (1996b)||5 percent debt increase in the United States||1.1||-0.6||0.7||0.2|
|IMF (1995b)||10 percent debt increase in the United States||…||…||0.7||-0.2|
|10 percent debt increase in Italy (increase in interest premium)||…||…||0.4||-0.2|
|IMF (1996d)||Gradual and credible deficit increase in Germany for total of 1 percent after four years (expenditure increase, partly offset by tax increase)||-0.3||-0.7||…||…|
|Same but not credible||0.1||-0.7||…||…|
|Front-loaded expenditure increase||0.5||-0.7||…||…|
|Bryant and others (1988)||Adaptive-expectations models1||1.2 to 2.0||0.0 to 1.9||…||…|
|Rational-expectations models2||0.7 to 1.6||0.2 to 0.7||… …|
|Bryant, Hooper, and Mann (1993)||Adaptive-expectations models3||1.0 to 1.3||-0.13 to -0.01||…||…|
|Rational-expectations models4||0.65 to 1.5||-0.09 to 0||…||…|
|Monetarist rational-expectations model5||0.10||0.01||…||…|
In addition, the magnitude of a fiscal retrenchment may have an influence on its macroeconomic effects; a large fiscal adjustment is more likely to signal a change in regime and modify consumers‘ expectations than a small one. Through a descriptive examination of large-scale fiscal adjustment experiences over the last 25 years in OECD countries, as well as through more formal econometric tests, it has been shown that such episodes frequently result in smaller output losses than suggested by standard Keynesian models and, in a number of cases, in negative fiscal multipliers.100 This non-Keynesian effect of large-scale fiscal retrenchment on activity cannot be systematically ascribed to monetary policy or to cross-country spillover effects, but rather it appears to reflect consumer response to the size of fiscal policy shocks.
Concerning the nexus between fiscal adjustment and interest rates, empirical findings from both reduced-form estimations and structural model simulations (Table 4) corroborate that interest rates are sensitive to a change in the public debt ratio. Specifically, an increase in government debt, equivalent to 25 percent of GDP, would result in an increase of 125 to 500 basis points in long-run interest rates.101 These should be regarded as a lower bound of the beneficial long-run effects that may result from debt reduction arising from the introduction of a permanent rule limiting debt or deficit ratios.102 The understatement of the interest rate effect stems from the inability of underlying models to capture the credibility effect associated with the operation of a binding rule, in addition to the interest rate decline attributable simply to a onetime increase in government saving. The credibility effect of a fiscal rule on interest rates can perhaps be approximated by a reduction in the default risk premium in financial markets on the debt of a country that pursued a vigorous fiscal adjustment program to correct an unsustainable path (Denmark and Ireland in 1980s, Italy in the early 1990s). Alternatively, in an attempt to measure default risk, it was found that interest differentials on comparable government bonds among EU member countries, normalized to a common currency, rarely exceeded 50 basis points, displaying a statistically insignificant relationship between interest rates and debt ratios.103
|Author||Type of Estimation or Simulation||Change in Interest Rate Due to 25 Percent Increase in Public Debt-GDP Ratio (basis points)|
|Tanzi and Fanizza (1995)||Panel estimation||175|
|Ford and Laxton (1995)||Cross-section systems estimation (world debt as explanatory variable)||250–450|
|Helbling and Wescott (1995)||Estimation using aggregate world data||400–500|
|IMF (1996a)||MULTIMOD simulations||300|
|Faruqee, Laxton, and Symansky (1996)||Simulation of a structural closed-economy model||125|
Again, however, since none of these countries was following a balanced-budget or debt-reduction rule, there appears to be a tenuous relationship between fiscal control (measured by debt levels) and default risk. Of course, the large domestic interest differentials may be influenced by the degree of fiscal control, but they are more likely to reflect inflation or exchange rate risk differentials. In yet another attempt to measure the exogenous credibility effect, similar fiscal adjustment scenarios were simulated for Italy and the United States with one important difference: the default risk premium for Italy was assumed to decline as the adjustment took place, whereas it remained unchanged for the United States. The results show that compared with the United States, fiscal adjustment in Italy would tend to appreciate the domestic currency, interest rates would decline significantly more, and output would be more buoyant.104
A central question that arises in connection with fiscal policy rules relates to their impact on the short-term variability of aggregate output and income. To examine this question, a number of stochastic simulations, applying the IMF‘s MULTIMOD model, have been performed for the Group of Seven industrial countries to ascertain the effect of relevant fiscal rules. MULTIMOD, an empirically estimated macroeconomic world model subject to scrutiny both inside and outside the IMF, is well suited to analyze this question. The simulated rules are, in fact, stylized versions of the following: the proposed U.S. balanced-budget amendment; the Stability and Growth Pact under EMU, which calls for a fiscal target near balance, subject to a deficit limit of 3 percent of GDP and a debt limit of 60 percent of GDP; and the Japanese government‘s intention of adhering to its current balanced-budget rule in the future. Except for the U.S. proposal, all rules are assumed to allow for the operation of automatic stabilizers, under the specified constraints. This appendix consists of two parts: the first provides a description of the methodology and the second reports the simulation results.
Ordinarily, application of MULTIMOD for simulation analysis—in the context of the World Economic Outlook (WEO) exercises and Article IV consultations—is deterministic in that the residuals of the model are held constant. In the absence of policy shocks, the model tracks a baseline of endogenous variables. Such simulations are generally used to evaluate the effects of changes in a policy variable or those of exogenous shock on the values of output, exchange rates, interest rates, fiscal balance, inflation, or other endogenous variables. However, policymakers are interested not only in the short-run effects and dynamic repercussions of specified exogenous shocks but also in the variance caused by such shocks, including policy actions. From this perspective, stochastic simulations are particularly useful for comparing and evaluating various policy regimes. They can provide information on the robustness of a policy regime under plausible shocks and policy actions, consistent with historical experience.
In contrast to deterministic simulations, stochastic simulations require assumptions about the probability distribution of the residuals and, in some cases, of the exogenous variables. The probability distribution is generally derived from historical data over a sample period to produce a variance-covariance matrix of residuals or policy shocks or both. Repeated draws of residuals consistent with this probability distribution are used to solve the model. The results of these draws for the simulated endogenous variables are then evaluated by comparing key summary statistics (mean, mean-absolute error, root-mean-square error (RMSE), variance) across different policy rules.
Overall, the simulation results suggest that the largest output variability arises from strict adherence to a yearly balanced-budget rule through cuts in government consumption and is, on average, over 1 percent of GDP higher than in the baseline simulation. Not surprisingly, output variability is reduced significantly when the fiscal rule allows for the operation of automatic stabilizers. Moreover, implementation of the rule through adjustment in transfers or taxes displays a lower output variability than through adjustment in government consumption. However, operation of a flexible debt rule, if enforced, would not result in greater output variability than the baseline simulation. On balance, therefore, any increase in output variability may be outweighed by the credibility gains that ensue from fiscal rules.
Stochastic simulations consist of repeated “trials,” or draws, from a standard normal distribution of random shocks, with a mean of 0 and a variance of 1, based on a simple transformation of a variance-covariance matrix.105 This matrix is derived from the historical error terms of the model. For each draw, the model is simulated to produce the solution values for that trial. The process is repeated for successive periods until an arbitrary horizon is reached.106 In this exercise, for each fiscal policy rule, the model was simulated 36 times for 10 years, for a total of 360 trials.107 The simulated outcomes were then used to calculate the RMSE of key endogenous variables from their baseline paths.
The above procedure was subject to a number of modifications that affect the derivation of the variance-covariance matrix constructed with residuals consistent with the estimated equations of MULTIMOD. Whereas the first three modifications were similar to those used in an earlier paper (Masson and Symansky, 1992) and are only briefly mentioned, the treatment of fiscal policy, unique to this exercise, is discussed in detail.
First, given numerous data revisions and six additional years of observations since the original estimation of the model, some of the original equations may not fit as well as they did in 1990. Specifically, the historical residuals are no longer truly random (white noise) residuals. As it is beyond the scope of this exercise to reestimate the behavioral equations, the residuals have been whitened before computing the variance-covariance matrix. Autoregressive equations of the raw residuals—calculated from the behavioral equations—that include a constant, their own lagged value, and a time trend were estimated and added to the model.108
Second, since expectations of certain variables appear in several of the estimated equations, proxies were formed using time-series techniques. The variables include human and capital wealth (which depend on expected future income) and expected future short-term interest rates, prices, and exchange rates.109
Third, a specific assumption regarding exchange rate expectations—critical in the evaluation of alternative exchange rate and monetary regimes—was used for the interest parity equation. Although the residuals in the interest parity equation reflect a combination of default risk and expectation error, the model implicitly treats these residuals merely as a default premium. Although static expectation of exchange rates is somewhat inconsistent with the assumption used in other equations of the model, it is used in these simulations to reduce the size of the residuals.
Fourth, the fiscal data were redefined and equations were added to capture certain aspects of fiscal policy that are not part of the standard version of the model. In MULTIMOD, the tax variable is defined net of transfers under the assumption that transfers and taxes have the same effect on disposable income and economic activity. However, in this exercise, taxes and transfers were treated separately for several reasons: (a) taxes, especially capital and payroll taxes, tend to be more distortionary than transfers; (b) taxes tend to vary more over the cycle than transfers, the former displaying a higher elasticity with respect to income; and (c) their historical variability may exhibit significant differences. A separate equation for each fiscal variable was added to the model to incorporate their unexplained variation into the stochastic process, which represents the discretionary component of these policies. These include a government consumption equation that relates spending (as a ratio of potential output) to its lagged value, a constant, and a time trend; and similar equations for transfers and taxes, except that tax revenue is specified as a ratio of actual income. Furthermore, in the standard version of MULTIMOD, there is an intertemporal government budget constraint enforced through taxes that allows the automatic stabilizers to operate over the short term but does not allow debt to grow without limit. This equation was dropped from the model, but the nature of the stochastic shocks and the properties of the model ensure that this is not a problem in this exercise.110
Finally, the residuals of equations that were not critical to the analysis (such as the import of commodities) were dropped in order to reduce the magnitude of the exercise. Table 5, based on an estimation period of 1974–95, summarizes the properties of the autoregressive residual equations. The standard errors in these regressions characterize the main diagonal of the variance-covariance matrix.
|United States||Japan||Germany||United Kingdom||Canada||France||Italy|
|Long-term interest rate||0.63||(0.18)||0.012||0.48||(0.19)||0.008||0.54||(0.19)||0.010||0.34||(0.19)||0.012||0.64||(0.18)||0.012||0.65||(0.18)||0.012||0.62||(0.19)||0.013|
Although interpretation of the estimation results is straightforward, it is difficult to disentangle the relative importance of the different variables. For example, the standard error of the investment equation is relatively small, but, as it represents unexplained variation in the capital stock (which is approximately three times the size of output), this stochastic element is numerically important. In contrast, the oil consumption equation, with a large standard error, has little effect on the variance of output because of the relatively small weight of oil.
The standard errors of the coefficients of the fiscal variables have potentially important implications. The unexplained component of government consumption is smaller than that of either taxes or transfers (Table 5), reflecting more inherent variability in the latter (Figure 1). This implies that fiscal rules that are met through adjustment in taxes or transfers may have relatively smaller effects on output since this adjustment may offset the initial source of variance. Similarly, since government consumption has been historically stable, reliance on this variable to balance the budget is likely to add to output variability.
Figure 1.General Government Revenue and Expenditure
Source: International Monetary Fund, World Economic Outlook database.
The baseline simulation serves as a standard of comparison for the simulation of selected fiscal rules. It includes the fiscal equations, discussed above, that allow for the operation of automatic stabilizers as well as discretionary policy through the stochastic elements. As previously indicated, government consumption and transfer payments grow as a function of potential output and tax revenues of actual income. Whether fiscal rules increase or decrease total variability will depend on the relative size and persistence of exogenous fiscal policy shocks, compared with those of the other underlying shocks, and on their interplay with automatic stabilizers.
Comparison of the variability in the baseline simulation and the actual historical variability of endogenous variables111 reveals that the baseline simulation represents a reasonable, although not perfect, characterization of macroeconomic variability (Table 6). Thus, the baseline can justifiably be used to assess the effects of alternative fiscal rules. In general, GDP is used as the summary variable to compare the similarity of the historical variability and the baseline variability. GDP variation differs by nearly 0.5 percentage point for the United States and France and 0.7 percentage point for Italy, and is identical to its historical variability for Canada. In the case of Canada, however, GDP variability masks some more significant differences in the variability of interest rates and investment. For Germany and the United Kingdom, the baseline output variability is over 1 percentage point higher than its historical variability. Meanwhile, the baseline variability of output in Japan is 1.5 percentage points greater than its historical variability—apparently as a result of the poor tracking performance of investment in MULTIMOD. Somewhat surprisingly, the baseline in Japan shows smaller variation in the exchange rate and government deficits. One way of putting in perspective the magnitude of the difference between the historical and baseline variance is to compare them with their forecast errors. An analysis of the forecast errors for major industrial countries (IMF, 1996a, Annex I) revealed that for real GDP growth in industrial countries the average current-year RMSE was 0.72, and 1.46 for the one-step-ahead forecast, with the smallest errors for the United States and France and the largest for Germany, Italy, and Japan. These results are consistent with the differences between the historical and baseline output variations.
|(Root-mean-square error, in percentage terms)|
|Actual (1974–95)||Baseline Simulation||Government consumption adjustment (1)||Transfer adjustment (2)||Tax adjustment (3)||No deficit (4)||Deficit ceiling (3 percent of GDP)(5)||Debt target (6)|
|Long-term interest rate||2.21||1.40||1.16||1.34||1.32||1.33||1.34||1.22|
|Exchange rate ($/LC)||–||–||–||–||–||–||–||–|
|Long-term interest rate||1.91||1.25||1.24||1.21||1.18||1.43||1.20||1.17|
|Exchange rate ($/LC)||11.17||9.45||7.54||8.91||8.42||8.59||8.48||7.40|
|Long-term interest rate||1.22||1.98||1.79||1.91||1.87||2.11||1.99||1.98|
|Exchange rate ($/LC)||11.41||8.78||7.09||8.43||7.63||7.62||8.09||7.32|
|Long-term interest rate||2.05||1.64||1.71||1.64||1.62||1.81||1.67||1.72|
|Exchange rate ($/LC)||4.13||8.21||7.64||8.11||8.04||7.97||8.02||7.68|
|Long-term interest rate||2.53||1.47||1.30||1.40||1.36||1.53||1.47||1.36|
|Exchange rate ($/LC)||12.29||8.78||7.09||8.43||7.63||7.62||8.09||7.32|
|Long-term interest rate||2.83||2.14||1.99||2.08||2.05||2.19||2.14||2.02|
|Exchange rate ($/LC)||12.84||8.78||7.09||8.43||7.63||7.62||8.09||7.32|
|Long-term interest rate||2.17||1.78||1.47||1.68||1.63||1.74||1.70||1.66|
|Exchange rate ($/LC)||10.26||8.78||7.09||8.43||7.63||7.62||8.09||7.32|
The historical variation in the government deficit ranges from 1.5 percent of GDP for the United States to 3.7 percent of GDP for Italy. Allowing the automatic stabilizers to work, as in the baseline simulation, results in a deficit variation similar to the historical variation for these two countries. Again, Japan tends to show the most sizable difference in deficit variation: 3 percent of GDP historically, but only 2 percent of GDP when automatic stabilizers are allowed to operate.
As noted earlier, taxes and transfers tend to show substantially more variation than government consumption, and, with the exception of the United States, taxes are more variable than transfers. On the other hand, even in cases where taxes historically have been more variable than transfers, they are not necessarily more unpredictable, as seen in the baseline (Japan and Canada); meanwhile, government consumption remains less variable than the other two fiscal variables.
Comparison of Fiscal Rules
Six policy simulations were performed: (1) balanced budget enforced through government consumption adjustment; (2) balanced budget enforced through transfer adjustment; (3) balanced budget enforced through tax adjustment; (4) no-deficit rule, but allowance for automatic stabilizers when in surplus; (5) a 3 percent of GDP budget deficit ceiling with allowance for automatic stabilizers below the ceiling; and (6) debt target, with allowance for short-run debt accumulation or drawdown. All the rules, except (2) and (3), are assumed to be met through adjustment in government consumption. The rules are stylized in that they are binding and are always realized ex post. However, rules (4) through (6) allow for the operation of automatic stabilizers, namely, downward in (4) and symmetrically in (6), whereas (5) is symmetric up to the ceiling. The debt rule (6) represents the closest approximation to the “tax-smoothing” function of government. Although it allows the automatic stabilizers to work, this rule also attempts to offset the debt buildup that can occur over the cycle and effectively adds a stock condition to the debt target rule. This is analogous to the discussion in the monetary literature, where it is recognized that an inflation rule (deficit) allows for “drift” in the price level (debt).
There is no metric used in this paper to compare the various regimes. Conceptually, a welfare or utility measure could be used, but the results would depend upon subjective weighting of the mean and variance of different endogenous and policy variables. Rather, Table 6 lets the reader compare the various regimes. The discussion below concentrates on output variability because it is associated with some important costs, including, for example, macroeconomic uncertainty and permanent unemployment if the labor market can be characterized with hysteresis.112 To put the RMSE comparisons in perspective, relative to the baseline simulation, for example, the 0.8 percentage point increase in output variability in the United States under simulation (1) may be viewed as large since it represents a 30 percent increase in variability. On the other hand, this difference could be considered small if compared with the average RMSE of WEO forecasts of GDP for the major industrial countries.
Several general conclusions can be drawn from the results (Table 6). First, relative to the baseline with the automatic stabilizers operating, when tight deficit control is implemented through adjustment of government consumption, in simulation (1) it tends to raise the variability of output, on average, by 1.4 percentage points, representing a 50 percent increase. This rule increases output variability from a low of just under 0.7 percentage point in Canada, and 0.85 in the United States and Germany, to substantially over 1 percentage point in France, and around 2 percentage points in Italy, Japan, and the United Kingdom. This increase in variability is the result of not allowing the automatic stabilizers to operate, as well as of following a procyclical policy, which more than outweighs the variability introduced through the stochastic elements of discretionary policy. However, the countries that exhibited the smallest increase in output variation generally have a more stable fiscal policy in the baseline (Canada, France, and United States), which limits the need for fiscal offset. Prices, which tend to be procyclical in the baseline, also exhibited more variability under the strict balanced-budget rule. Additionally, with government saving less variable, long-term interest rates were more stable under rule (1) than in the baseline.
The no-deficit rule, under simulation (4), which represents an asymmetric implementation of a strict expenditure-enforced deficit target, exhibits reduced variation relative to the comparable symmetric rule in (1). Although, on average, this simulation shows the second highest output variability, it is only, on average, 0.5 percentage point greater than in the baseline and less than 0.25 for over half the countries. This implies that a balanced-budget rule, if realistically implemented in an asymmetric fashion, might add little additional variability to output while providing a surplus bias to fiscal policy.113
The debt rule, given in (6), combines the tax-smoothing role of fiscal policy with long-term debt reduction and control. The automatic stabilizers are allowed to work over the short run as long as the stock of public debt remains relatively stable. This represents a pragmatic rule in that the speed at which a country must achieve a debt target is not precisely given. By letting the automatic stabilizers work, this rule offsets demand fluctuations, but, with one eye on debt control, it also avoids irresponsible fiscal policy. Under this fiscal rule, output variability is nearly identical to the baseline for most countries, with two countries showing reduced variability. Only in the case of Italy does debt stabilization show significantly more variation than when the automatic stabilizers are allowed to operate freely. This is largely owing to the high debt stock, which makes debt stabilization difficult over the short run.114
A comparison of fiscal rules based on the instrument of compliance suggests that adjustment in taxation or transfer payments tends to produce less variance than adjustment in government consumption. This appears to be inconsistent with the findings of Alesina and Perotti (1995) and McDermott and Wescott (1996), who conclude that successful fiscal policy is achieved through expenditure control. These results can be viewed, however, as providing partial support to those findings. Historically, tax ratios tend to show more variation than government consumption ratios (Figure 1). Therefore, if variation in the tax burden is an explanation for the variability of deficits, then achievement of a balanced budget through tax adjustment would remove a source of macroeconomic variability. Although tax variability in (3) is greater than in the baseline, in most countries it shows a significantly smaller increase in variation than government consumption did when the deficit target was achieved with spending adjustment. For Italy, in particular, tax variation is almost identical to the baseline and output variability is similar, implying that deficit variation is due to both discretionary tax policy and the automatic stabilizers. Only for the United States does the amount of tax variation increase significantly, and this is more a reflection of a relatively stable tax ratio in the baseline.
The general finding that output variability under tax or transfer adjustment is only modestly different than in the baseline partly reflects the undoing of a variable tax policy but also reflects the moderate Ricardian properties of MULTIMOD, indicating that tax changes have more muted effects on output than changes in government consumption. When deficit targets are achieved through changes in transfer payments, the results are remarkably similar to the regime where deficit targets are achieved through taxes. This partly reflects the similarity in tax and transfer variability in the baseline. In countries where taxes in the baseline show more variability than transfers (Germany), output variability tends to increase with transfer adjustment. The opposite occurs when transfers are more variable (the United States); when they are similar (Canada), the differences in these regimes are minimal. Additionally, relying on transfers rather than taxes tends to reduce output variation since transfer payments usually have less distortionary effects on private behavior than tax changes do.
The results of the deficit ceiling simulation (5) are similar to the baseline simulations, as the former can be regarded as a balanced-budget target, allowing for automatic stabilizers to operate symmetrically. Only in the case where the deficit target is breached is a strict fiscal reaction required and thus do the results show some reduction in the variance of debt. Given the variance in output in the baseline case, there are few occasions when the fiscal authorities would have to offset the automatic stabilizers to achieve the target.115
Finally, monetary policy is largely ignored in the analysis. The baseline assumes that exchange rates are fixed within EMU and that other countries target a stable money growth path. However, to the extent that fiscal policy has constrained the flexibility of monetary policy, moving to a fiscal rule has the potential to give increasing flexibility to monetary policy to stabilize output. Analysis of this important issue, nonetheless, is beyond the scope of this paper.
Alesina,Alberto, and TamimBayoumi,1996,“The Costs and Benefits of Fiscal Rules: Evidence from U.S. States,”NBER Working Paper No. 5614(Cambridge, Mass.:National Bureau of Economic Research).
Alesina,Alberto, and RobertoPerotti,1995,“The Political Economy of Budget Deficits,”Staff Papers, International Monetary Fund,Vol. 42(March),pp. 1–31.
———,1996,“Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects,”IMF Working Paper 96/70(Washington:International Monetary Fund).
Baliño,Tomás, and CharlesEnoch,1997,Currency Board Arrangements: Issues and Experiences,IMF Occasional Paper No. 151(Washington:International Monetary Fund).
Bayoumi,Tamim, and BarryEichengreen,1995,“Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization,”Staff Papers, International Monetary Fund,Vol. 42(March),pp. 32–48.
Bayoumi,Tamim, MorrisGoldstein, and GeoffreyWoglom,1995,“Do Credit Markets Discipline Sovereign Borrowers? Evidence from U.S. States,”Journal of Money, Credit and Banking,Vol. 27,Part 1(November),pp. 1046–59.
Bertola,Giuseppe, and A.Drazen,1993,“Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity,”American Economic Review,Vol. 83(March),pp. 11–26.
Blejer,Mario I., and others, eds., 1997,Optimum Currency Areas: New Analytical and Policy Developments(Washington:International Monetary Fund).
Bohn,Henning, and Robert P.Inman,1996,“Balanced Budget Rules and Public Deficits: Evidence from the U.S. States,”NBER Working Paper No. 5533(Cambridge, Mass.:National Bureau of Economic Research).
Bordo,Michael D., and Eugene N.White,1993,“British and French Finance During the Napoleonic Wars,” inMonetary Regimes in Transition, ed. by M.Bordo and F.Capie(Cambridge:Cambridge University Press).
Bryant,Ralph C., Dale W.Henderson,GeraldHoltham,PeterHooper, and Steven A.Symansky, eds., 1988,Empirical Macroeconomics for Interdependent Economies,2 vols.(Washington:Brookings Institution).
Bryant,Ralph C., PeterHooper, and Catherine L.Mann, eds., 1993,Evaluating Policy Regimes: New Research in Empirical Macroeconomics(Washington:Brookings Institution).
Bryant,Ralph C., and LongZhang,1996,“Intertemporal Fiscal Policy in Macroeconomic Models: Introduction and Major Alternatives,”Brookings Discussion Papers in International Economics, No. 123(Washington:Brookings Institution).
Buchanan,James M., and Richard E.Wagner,1977,Democracy in Deficit: The Political Legacy of Lord Keynes(New York:Academic Press).
Buiter,Willem, GiancarloCorsetti, and NourielRoubini,1993,“Maastricht‘s Fiscal Rules,”Economic Policy: A European Forum,Vol. 8(April),pp. 58–100.
Buti,M., D.Franco, and H.Ongena,1997,“Budgetary Policies During Recessions: Retrospective Application of the ‘Stability and Growth Pact‘ to the Post-War Period,”Economic Papers,No. 121(Brussels:European Commission Directorate-General for Economic and Financial Affairs).
Cangiano,Marco, 1996,“Accountability and Transparency in the Public Sector: The New Zealand Experience,”IMF Working Paper 96/122(Washington:International Monetary Fund).
Cheasty,Adrienne, and Jeffrey M.Davis,1996,“Fiscal Transition in Countries of the Former Soviet Union: An Interim Assessment,”IMF Working Paper 96/61(Washington:International Monetary Fund).
Clément,Jean A.P., JohannesMueller,StéphaneCossé, and Jean LeDem,1996,Aftermath of the CFA Franc Devaluation,IMF Occasional Paper No. 138(Washington:International Monetary Fund).
Corsetti,Giancarlo, and NourielRoubini,1993,“The Design of Optimal Fiscal Rules for Europe After 1992,” inAdjustment and Growth in the European Monetary Union, ed. by FranciscoTorres and FrancescoGiavazzi(Cambridge:Cambridge University Press).
Cottarelli,Carlo, 1993,Limiting Central Bank Credit to the Government: Theory and Practice,IMF Occasional Paper No. 110(Washington:International Monetary Fund).
Cour,Philippine, EricDubois,SelmaMahfouz, and JeanPisani-Ferry,1996,“The Cost of Fiscal Retrenchment Revisited: How Strong Is the Evidence?”CEPII Working Paper 96/16(Paris:Centre d‘Etudes Prospectives et d‘Informations Internationales).
Craig,Jon D., 1987,“Macro Controls on Public Spending,”Restraining Leviathan: Small Government in Practice, ed. by MichaelJames(St. Leonards, NSW, Australia:Centre for Independent Studies).
Cukierman,Alex, and Allan H.Metzler,1986,“A Positive Theory of Discretionary Policy, the Cost of Democratic Government, and the Benefits of a Constitution,”Economic Inquiry,Vol. 24(July),pp. 367–88.
de Menil,Georges, 1996,“Budgetary Policies in Europe on the Eve of Monetary Union,”paper presented at the DELTA-CEPII Workshop,“The Macroeconomic Effects of Fiscal Adjustments,”Paris,September(unpublished; Paris:Centre d‘Etudes Prospectives et d‘Informations Internationales).
Drazen,Allan, and Paul R.Masson,1994,“Credibility of Policies Versus Credibility of Policymakers,”IMF Working Paper 94/49(Washington:International Monetary Fund).
Dubois,Eric, 1996,“High Real Interest Rates: The Consequence of a Saving-Investment Disequilibrium or of an Insufficient Credibility of Monetary Authorities?”(unpublished; Paris:Institut National de la Statistique et des Etudes Economiques).
Easterly,William, 1996,“When Is Stabilization Expansionary? Evidence from High Inflation,”Economic Policy: A European Forum,No. 22(April),pp. 67–107.
Eichengreen,Barry, andJürgenvon Hagen,1995,“Fiscal Policy and Monetary Union: Federalism, Fiscal Restrictions and the No-Bailout Rule,”CEPR Discussion Paper No. 1247(London:Centre for Economic Policy Research).
Eichengreen,Barry, RicardoHausmann, and Jürgenvon Hagen,1996,“Reforming Budgetary Institutions in Latin America: The Case for a National Fiscal Council,”IDB Working Paper No. 011(Washington:Inter-American Development Bank).
European Commission,1995,“Methodological and Operational Aspects of the Reporting of Government Deficits and Debt Levels in the Context of the Excessive Deficit Procedure”(Brussels:Directorate-General II, July).
———,1996,“Annexes to the Conclusions of the Presidency,”Bulletin of the European Union(Brussels:European Commission, Secretariat-General),pp. 20–33.
Evans,Paul, 1985,“Do Large Deficits Produce High Interest Rates?”American Economic Review,Vol. 75(March),pp. 68–87.
Faruqee,Hamid, DouglasLaxton, and StevenSymansky,1996,“Government Debt, Life-Cycle Income, and Liquidity Constraints: Beyond Approximate Ricardian Equivalence,”IMF Working Paper 96/140(Washington: International Monetary Fund).
Fischer,Stanley, 1988,“International Macroeconomic Policy Coordination,” inInternational Economic Cooperation, ed. by MartinFeldstein(Chicago and London:University of Chicago Press).
———,RatnaSahay, Carlos A.Vegh,1996,“Stabilization and Growth in Transition Economies,”Journal of Economic Perspectives(Spring),pp. 45–66.
Ford,Robert, DouglasLaxton,1995,“World Public Debt and Real Interest Rates,”IMF Working Paper 95/30(Washington:International Monetary Fund).
Friedman,Milton, 1995,“Balanced Budget: Amendment Must Put Limit on Taxes,”Wall Street Journal(January 4), p. A12.
Gavin,Michael, Hausmann,RicardoPerotti,RobertoTalvi,Ernesto1996,“Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness,”IDB Working Paper No. 13(Washington:Inter-American Development Bank).
Green,John H., 1996,“Inflation Targeting: Theory and Policy Implications,”Staff Papers, International Monetary Fund,Vol. 43(December),pp. 779–95.
Guitián,Manuel, 1992,Rules and Discretion in International Economic Policy,IMF Occasional Paper No. 97(Washington:International Monetary Fund).
Helbling,Thomas, and RobertWescott,1995,“The Global Real Interest Rate,”Staff Studies for the World Economic Outlook, by the Research Department of the IMF(Washington:International Monetary Fund,September),pp. 28–51.
Helpman,Elhanan, LeonardoLeiderman, and GilBufman,1994,“New Breed Exchange Rate Bands: Chile, Israel, and Mexico,”Economic Policy: A European Forum,No. 19(October),pp. 259–306.
International Monetary Fund,1995a,Government Finance Statistics Yearbook(Washington).
———,1995b,World Economic Outlook, October 1995: A Survey by the Staff of the International Monetary Fund,World Economic and Financial Surveys(Washington).
———,1996a,World Economic Outlook, May 1996: A Survey by the Staff of the International Monetary Fund,World Economic and Financial Surveys(Washington).
———,1996b,World Economic Outlook, October 1996: A Survey by the Staff of the International Monetary Fund,World Economic and Financial Surveys(Washington).
———,1996c,“Germany: Recent Economic Developments and Selected Issues,”IMF Staff Country Report No. 96/111(Washington).
Kopits,George, 1994,“Monetary and Fiscal Management During the Transformation,” inGovernment and Markets: Establishing a Democratic Constitutional Order and a Market Economy in Former Socialist Countries, ed. by Hendrikus J.Blommestein and BernardSteunenberg(Dordrecht:Kluwer).
———,1997,“Are Europe‘s Social Security Finances Compatible with EMU?”IMF Paper on Policy Analysis and Assessment 97/3(Washington:International Monetary Fund).
———, and Jon Craig,1998,Transparency in Government Operations,IMF Occasional Paper No. 158(Washington:International Monetary Fund).
Kopits,George, RobertHagemann,LazarosMolho, and OlavBjerkholt,1993,“Fiscal Rules in Indonesia: Analysis and Reform Proposal” (unpublished; Washington:International Monetary Fund,March).
Kotlikoff,Laurence J., 1989,“From Deficit Delusion to the Fiscal Balance Rule: Looking for an Economically Meaningful Way to Assess Fiscal Policy,”IMF Working Paper 89/50(Washington:International Monetary Fund).
Kydland,Finn E., and Edward C.Prescott,1977,“Rules Rather Than Discretion: The Inconsistency of Optimal Plans,”Journal of Political Economy,Vol. 85,pp. 473–91.
Laidler, David, 1985,“Fiscal Deficits and International Monetary Institutions,”Centre for the Study of International Economic Relations Working Paper No. 8526C(London, Canada:University of Western Ontario, Department of Economics).
Masson,Paul R., 1996,“Fiscal Dimensions of EMU,”Economic Journal: The Journal of the Royal Economic Society,Vol. 106(July),pp. 996–1004.
———, and MichaelMussa,1995,“Long-Term Tendencies in Budget Deficits and Debt,”IMF Working Paper 95/128(Washington:International Monetary Fund).
Masson,Paul R., and StevenSymansky,1992,“Evaluating the EMS and EMU Using Stochastic Simulations: Some Issues,”Macroeconomic Policy Coordination in Europe: The ERM and Monetary Union, ed. by RayBarrell and JohnWhitley(London:SAGE Publications Ltd).
McDermott,John C., and Robert F.Wescott,1996,“An Empirical Analysis of Fiscal Adjustments,”Staff Papers,International Monetary Fund,Vol. 43(December),pp. 725–53.
McKinnon,Ronald I., 1996,“Monetary Regimes, Government Borrowing Constraints, and Market-Preserving Federalism: Implications for EMU,”paper presented at the conference,“The Nation State in a Global/Information Era: Policy Changes,”(Queen‘s University, Kingston, Ontario,:November13–15 (unpublished).
Millar,Jonathan1997,“The Effects of Budget Rules on Fiscal Performance and Macroeconomic Stabilization,”Bank of Canada Working Paper:97–15(June).
Musgrave,Richard A., and Peggy B.Musgrave,1989,Public Finance in Theory and Practice(United States:McGraw-Hill, Inc.,5th ed).
Mussa,Michael, 1994,“Monetary Policy: U.S. Monetary Policy in the 1980s,”American Economic Policy in the 1980s, ed. by MartinFeldstein(Chicago:University of Chicago Press).
New Zealand Treasury,1995,Fiscal Responsibility Act of 1994: An Explanation(Wellington:Adprint Ltd.,September).
Oort,C.J., and G. deMan,1968,“De ‘Zijlstra-norm‘ in Theorie en Praktijk,”Reprint from Economisch Kwartaaloverzicht,Nos. 12 and 13(Amsterdam:Amsterdam-Rotterdam Bank NV).
Organization for Economic Cooperation and Development,1995,Economic Outlook,No. 57(Paris:OECDJune).
Persson,Torsten, and Guido EnricoTabellini,1990,Macroeconomic Policy, Credibility and Politics(Chur, Switzerland:Harwood Academic Publishers).
Phelps,Edmund S., 1961,“The Golden Rule of Accumulation: A Fable for Growthmen,”American Economic Review,Vol. 51(September),pp. 638–41.
Reischauer,Robert D., 1997,“The Unfulfillable Promise: Cutting Nondefense Discretionary Spending,”Setting National Priorities: Budget Choices for the Next Century, ed. by Robert D.Reischauer(Washington:Brookings Institution Press).
Roseveare,Deborah, WilliLeibfritz,DouglasFore, and EckhardWurzel,1996,“Ageing Populations, Pension Systems and Government Budgets: Simulations for 20 OECD Countries,”Economics Department Working Paper No. 168(Paris:Organization for Economic Cooperation and Development).
Suits,Daniel B., and Ronald C.Fisher,1985,“A Balanced Budget Constitutional Amendment: Economic Complexities and Uncertainties,”National Tax Journal,Vol. 38(December),pp. 467–77
Sutherland,Alan, 1995,“Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?”CEPR Discussion Paper No. 1246(London:Centre for Economic Policy ResearchSeptember).
Switzerland, Federal Council,1995,“Rapport destiné Ȥ l‘envoie en consultation concernant un frein à l‘endettement”(Bern,October).
Tanzi,Vito, 1989,“International Coordination of Fiscal Policies: Current and Future Issues,”Fiscal Policy, Economic Adjustment, and Financial Markets, ed. by MarioMonti(Washington:International Monetary Fund).
———,1994,“The Political Economy of Fiscal Deficit Reduction,”Public Sector Deficits and Macroeconomic Performance, ed. by Williauthor RussellEasterly,Carlos AlfredoRodríguez, andKlausSchmidt-Hebbel(New York:Oxford University Press for the World Bank).
———,FanizzaDomenico1995,“Fiscal Deficit and Public Debt in Industrial Countries, 1970–1994,”IMF Working Paper 95/49(Washington:International Monetary Fund).
Tanzi,Vito, and LudgerSchuknecht,1995,“The Growth of Government and Reform of the State in Industrial Countries,”IMF Working Paper 95/130(Washington:International Monetary Fund).
Taylor,John B., 1993,“Discretion Versus Policy Rules in Practice”Carnegie-Rochester Conference Series on Public Policy,Vol. 38/39C.4(Amsterdam:North Holland),pp. 195–214.
Teijeiro,Mario, 1996,La Polȷtica Fiscal Durante la Convertibilidad, 1991–95(Buenos Aires:Centro de Estudios PɐblicosJuly).
Ter-Minassian,Teresa, 1996,“Borrowing by Subnational Governments: Issues and Selected International Experiences,”IMF Paper on Policy Analysis and Assessment 96/4(Washington:International Monetary Fund).
United States,1995,Economic Report of the President: Transmitted to the Congress, February 1995(Washington:Government Printing Office).
U.S. General Accounting Office,1989,“Social Security: The Trust Fund Reserve Accumulation, the Economy, and the Federal Budget,”Report to the Chairman, Subcommittee on Social Security and Family Policy, U.S. Senate Committee on Finance(Washington:General Accounting Office,January).
von Hagen,JŨrgen, and Ian J.Harden,1994,“National Budget Processes and Fiscal Performance,”European Economy, Reports and Studies: Towards Greater Fiscal Discipline(Brussels:European Commission, Directorate-General for Economic and Financial AffairsNo. 3),pp. 311–418
———,1996,“Budget Processes and Commitment to Fiscal Discipline,”IMF Working Paper 96/78(Washington:International Monetary Fund).
Wellink,A.H.E.M., 1996,“Budgetary Control: Good-hart‘s Law in Government Finances?”Essays on Money, Banking, and Regulation: Essays in Honour of C.J. Oort, ed. by ClemensKool,JoanMuysken, andTom vanVeen(Dordrecht:Kluwer Academic Publishers
For a description of major types of fiscal policy rules, including institutional arrangements, see Appendix I.
From a semantic point of view, a fiscal rule may take the form of a budget norm (the Netherlands), reference value (EMU), guideline (Indonesia), or principle (New Zealand), among others. The term “rule” is rarely used in any country for statutory purposes.
For a discussion of various, mostly temporary, budget norms in the Netherlands, see Oort and de Man (1968).
Inflation targeting, for instance, is to be observed both ex ante and ex post in some countries, but only ex ante in others. Exchange rate rules, whether in fixed or in preannounced crawling forms, are often specified within a wide band around a central rate. Also, the targeting of monetary aggregates or inflation in a number of countries is specified within a margin. The purpose of these margins and of exchange rate bands is comparable to the latitude provided for balanced-budget rules, namely, for accommodating the impact of unanticipated exogenous developments. For most of these rules, nonobservance is penalized by loss in reputation.
Financial penalties are usually imposed for violating an international treaty obligation—applicable for EMU or the CFA—by a country vis-Ȥ-vis a supranational authority, but seldom, if at all, in the context of national or subnational rules.
As observed by Mussa (1994) with respect to monetary policy, the distinction between rules-based and discretionary regimes tends to fade when implementation of the former is widely open to interpretation and when the latter is applied with some degree of consistency and regularity.
The Budget Enforcement Act of 1990 in the United States is a recent example of a procedural rule (effective through 1998) whereby any excess discretionary spending over the specified limits is subject to sequestration by a uniform percentage across activities.
It may be noted that all stochastic simulations reported in Section III have been performed on contingent policy rules that broadly specify whether the rules-based adjustment takes place on the revenue or the (noninterest) expenditure side.
See Masson and Mussa (1995) and Tanzi and Schuknecht (1995). Apart from the exceptional spending demands imposed by major wars and the Great Depression, fiscal policy in the industrial countries was relatively disciplined and debt ratios were stable until the early 1970s. To a large extent, fiscal rectitude was dictated by the needs of adhering to the gold standard and the Bretton Woods system. In essence, this period can be characterized as one of adherence to an implicit fiscal rule imposed by the existing monetary regime; see Laidler (1985) and Bordo and White (1993).
This, in effect, was a departure from the policy prescription based on either a Keynesian or a neoclassical (“tax-smoothing”) approach.
See, for example, the evidence presented for the 1970–95 period in Latin America, in Gavin and others (1996).
Examples of medium-term fiscal consolidation plans launched in the industrial countries in the 1980s are the so-called Trilogy in Australia, the Deficit Reduction and Debt Control Act in Canada, the Goria Plan in Italy, the Medium-Term Financial Strategy in the United Kingdom, and the Gramm-Rudman-Hollings Act in the United States. Some of these plans were vitiated by creative accounting, overoptimistic macroeconomic fore-casts underlying the fiscal targets, and a lack of accountability for nonobservance of targets.
Between 1970 and 1995, out of the 74 episodes identified in IMF (1996a), there were only 14 documented cases of successful fiscal adjustment in industrial countries. Recent examples of significant and durable adjustment, underpinned by reform measures, can be found in Denmark, Ireland, the Netherlands, and New Zealand.
Among developing countries, the experiences of Ghana and Turkey since the early 1990s illustrate the unraveling of earlier successful fiscal adjustment. Subsequent adjustment programs have been adopted by Argentina in 1991 and Ghana in 1994. By contrast, Chile has pursued a sustained fiscal adjustment since the mid-1980s.
On the contrary, there is ample evidence to support the view that a credible expenditure-based stabilization, in combination with structural reform, may be associated with an expansion toward trend growth and a deceleration in inflation. For industrial countries, see Alesina and Perotti (1996); for developing and transition economies, see Easterly (1996).
In the Netherlands, the rule was abandoned in the 1950s; in Japan, it was in effect suspended in 1975; and in Germany, it has been increasingly ignored in recent years.
See footnote 13 above.
According to Buchanan and Wagner (1977), the balanced-budget rule is necessary to restrain the politically rational behavior of policymakers—reflected in the deficit bias—in response to the electorate’s failure to understand the intertemporal budget constraint. See the discussion of trade-offs in Corsetti and Roubini (1993).
As indicated in footnote 11, the exchange rate regime under the Bretton Woods system imposed, in effect, a rules-based constraint on fiscal policy—although not necessarily binding, since the peg could shift. Similarly, a currency board arrangement is not likely to be sustainable—except at a high cost in terms of crowding out or external indebtedness—without strict limits on domestic bank credit for the government. See Balino and Enoch (1997).
Likewise, a rule requiring a specified level of reserves under a public pension scheme, or other contributory entitlement program, is based on an intergenerational equity criterion. The accumulation of contingency reserves for public pension programs in Canada, Japan, and the United States is predicated on this criterion. As shown by Kotlikoff (1989), a balanced budget or surplus over one or several years does not guarantee intergenerational equity.
Although the theory of optimum currency areas is silent on the appropriate fiscal policy regime, in practice a currency area requires either a unified fiscal policy or a supporting fiscal policy rule applicable to members of the area; see the papers by Mundell and Goodhart in Blejer and others (1997).
In the EU, the bulk of fiscal resources remains below the supranational level—in part explained by the subsidiarity principle—permitting the national authorities to retain the stabilization function (at least through the automatic stabilizers), subject to the EMU deficit reference value.
This resembles the central argument for a rules-based versus a discretion-based exchange rate system, on grounds that the former reduces negative spillovers of national policies on the international economy; see Guitián (1992).
McKinnon (1996) observes that the lack of sufficient separation between the fiscal and monetary authorities—and the ensuing lack of hard budget constraints—at various levels of government, within the EU context, strengthens the case for fiscal rules under EMU, as compared with the U.S. states where constraints are imposed more effectively by financial markets.
As shown in Kydland and Prescott (1977), in a dynamic two-period context, rules-based policies are time consistent and lead to a higher level of welfare than discretionary policies, given the likely reaction of private agents with rational expectations to the incentive of governments to deviate from previously announced policies under discretion.
In this regard, fiscal rules may be particularly relevant for economies in transition; see Kopits (1994).
A surge in government spending—usually accompanied by widening fiscal imbalances—immediately prior to elections has been the dominant domestic macroeconomic shock over the last 15 years in Costa Rica.
In December 1996, on the advice of the Fiscal System Council, the authorities decided to reduce the government deficit (excluding social security operations) to 3 percent of GDP and to refrain from issuing general-purpose bonds over the medium term. After achieving these goals by 2005 at the latest, the authorities will endeavor to prevent a further increase in debt outstanding.
See the critical review of several consecutive policy norms (underpinned by coalition agreements) in Wellink (1996).
Under the Fiscal Responsibility Act, the statement of responsibility, which accompanies published fiscal reports, stipulates that (1) the minister of finance is responsible for the overall integrity of the reports and for their consistency with legislated fiscal rules, (2) the minister is to provide the secretary to the treasury with all relevant policy decisions and information needed to prepare the reports, and (3) the secretary is to confirm that the treasury department has used its best technical skills and professional judgment to incorporate that information into the reports.
In a similar vein, von Hagen and Harden (1994) and Eichengreen, Hausmann, and von Hagen (1996) proposed, respectively, the creation of national debt boards for European countries and national fiscal councils for Latin American countries—endowed with independence especially vis-a-vis the executive branch—to set limits on, and ensure compliance with, the permissible increase in public debt and thus constrain the annual budget deficit.
For example—though without a policy rule—in both Chile and Italy, legislative modification of the budget is acceptable only if the resulting additional spending is offset by compensatory measures, so as to leave the overall balance unaltered.
For a discussion of expenditure control techniques used for complying with medium-term fiscal consolidation plans in Australia, the United Kingdom, and the United States in the mid-1980s, see Craig (1987).
Such practices seem to be proliferating in certain EU member countries in the run-up to the final stages of EMU. For a discussion of both the New Zealand and EMU accounting standards, see Kopits and Craig (1998).
A member country experiencing an annual fall in real GDP of at least 2 percent (or 0.75 percent in the light of further supporting evidence) can invoke exceptional circumstances. This definition of exceptional circumstances may impose a serious burden on a country undergoing a smaller annual downturn, albeit over a longer period, or on a less advanced country that is on a higher trend growth path. Indeed, it would seem more reasonable to define the downturn in reference to trend GDP growth and incurred over a period longer than one year.
Unlike in many other countries, in Switzerland, the government cannot be sued in a court of law for violating the constitution; instead, the government is subject to legislative censure—a rather hypothetical occurrence.
In 1994, CFA franc zone countries sought to correct the imbalance with a major devaluation, followed by a medium-term stabilization effort that included a significant fiscal adjustment. See Clement and others (1996).
For examples of circumvention of the balanced-budget rule in Michigan and New York, see Suits and Fisher (1985).
In addition, the gubernatorial line-item veto limits the size of deficits, and restrictions on debt issues tend to reduce outstanding debt but at the expense of capital rather than current outlays. See Bohn and Inman (1996).
State governments were responsible for about 15 percent of the fiscal offset to changes in state value added in the 1970s and 1980s, while the federal government and the social security trust funds provided the remainder; see Bayoumi and Eichengreen (1995).
The responsiveness is stronger upon including in the budget measure the states‘ insurance trust funds and upon using the income level rather than the unemployment rate as the cyclical variable; see Bohn and Inman (1996).
See the statistically significant nonlinear explanation for municipal bond yields in terms of the state debt-output ratio and fiscal control, in Bayoumi, Goldstein, and Woglom (1995).
The question remains, however, as to whether they can hold under all situations, as illustrated by the strains in the exchange rate mechanism (ERM) in 1992.
For a critical view of the Argentine case, where, under the currency board arrangement, fiscal deficits were largely financed with privatization receipts and external borrowing, see Teijeiro (1996).
Estonia is a special case of a broader range of adjustment programs adopted in some of these countries where the combination of a pegged exchange rate and fiscal retrenchment spurred growth while reducing inflation. See Fischer, Sahay, and Vegh (1996).
Over the period 1992–95, only four countries (Belgium, Italy, the Netherlands, and the United Kingdom) managed to reduce expenditure; see Masson (1996).
Recent examples of one-off measures include an extraordinary transfer from a state-owned enterprise in France, a government wage freeze in Spain and Germany, and a temporary income tax surcharge in Italy.
Alternatively, there is a view that the relatively high level of some European interest rates, despite the recession, reflects a premium due to the implicit assumption of the debt obligations of certain high-debt countries.
See Appendix II on the macroeconomic effects of fiscal adjustment, and Alesina and Perotti (1996) for an analysis of the successful adjustment implemented by Denmark and Ireland in the 1980s, and the less successful experience of Italy in the 1990s.
Simulations conducted on the basis of MULTIMOD suggest that the EU-wide effects of satisfying the EMU deficit reference value would have a relatively moderate negative contractionary impact, reflecting the benefits of declining interest rates—if the underlying fiscal measures are perceived as part of a credible and irreversible adjustment program.
At best, these results can be regarded as suggestive only, since they depend crucially on MULTIMOD providing a reasonable characterization of past economic behavior. Since the model is generally linear and most of the simulated budget rules are symmetric, average macroeconomic conditions, including the average level of public deficits and debt, are largely independent of the fiscal rule; rather, it is their variability that is affected. An effective balanced-budget rule may raise the variance of output, but it is also likely to increase policy credibility, lower interest rates, and increase the mean level of output. On the other hand, strict adherence to rules does not necessarily enhance credibility when such a policy stance is viewed as untenable. See Drazen and Masson (1994) in the context of the ERM.
In many ways, this is analogous to the advantage of multiyear monetary targeting, which avoids the drift in the price level associated with inflation targeting; see Green (1996).
For an elaboration of this argument, see Buchanan and Wagner (1977). Independently, Persson and Tabellini (1990) provide formal support to the argument in the context of a dynamic fiscal policy model that casts the government and the electorate in a principal-agent relationship.
Building on the demonstration in Kydland and Prescott (1977), Cukierman and Metzler (1986) argue that a constitutional rule is necessary to ensure that a politically motivated government facing elections abides by a precommitment to fiscal discipline, and, by contrast, that an apolitical social planner who maximizes expected social welfare honors such precommitment equally without such a rule.
These conditions are also essential for the successful implementation of a medium-term adjustment plan. Indeed, lack of sufficient commitment contributed, for example, to the failure of the Gramm-Rudman-Hollings Act in the United States.
Other examples include the U.S. states prior to the Civil War, and Japan and several European countries after World War II. The experience of very high inflation, external indebtedness, and contraction of output—sometimes reflected in widespread shortages—can provide the necessary resolve for the authorities, buttressed by popular consensus, to adopt fiscal rules.
The success of any fiscal adjustment program requires consistency between official pronouncements and actual policy measures; see Tanzi (1994).
The critical assessment of the efforts under way in the United States to attain the balanced-budget target (not subject to a rule) in 2002, discussed in Reischauer (1997), would be even more relevant for attempts to adhere permanently to that target under a rule.
At an annual nominal GDP growth rate of 5 percent (assuming 3 percent real growth and 2 percent inflation), in the long run, observance of a fiscal deficit limit of 3 percent of GDP will result in a public debt of 60 percent of GDP. See the derivation in Buiter, Corsetti, and Roubini (1993).
Consistent with the simulation results reported in Section III, Buti, Franco, and Ongena (1997) estimate that, on average, a 1 percent fall in GDP results in an increase of slightly over ½ of 1 percent of GDP in the fiscal deficit of EU countries, on the strength of automatic stabilizers. Hence, for a country targeting a balanced budget at potential output, a 5 percent shortfall from trend GDP would result roughly in a deficit equivalent to 3 percent of GDP.
As a case in point, in the area of exchange rate policy rules, under a fixed or preannounced crawling exchange rate, the wider the band around the central rate, the greater is the risk that the anchor may not be credible. See, for example, Helpman, Leiderman, and Bufman (1994).
Thus, although, in principle, the pact provides sufficient flexibility under the deficit reference value, in practice, some of these countries—because they are entering EMU with deficits close to 3 percent of GDP—are confronting the need to comply with a rigid ceiling.
For instance, this is the approach being followed by Costa Rica in preparing for the introduction of its proposed constitutional amendment.
Medium-term fiscal adjustment plans that impose a constraint on a fiscal aggregate only for the duration of the government—including a fixed limit on real government expenditures introduced in the early 1980s in the Netherlands or more recently in France, and the minimum primary surplus specified in Belgium—are not intended to be permanent and thus do not qualify as fiscal rules in this paper.
The term “golden rule,” originated by Phelps (1961), derives from neoclassical growth theory where it is used to describe the optimal growth that gives the maximum level of sustainable consumption per person in an economy. As Musgrave and Musgrave (1989, p. 678) argue, under this concept, “efficient division of output between capital and labor is determined by market forces, such that the rate of return on investment is equated to the time preference of consumers. Budget policy in this case should provide for balance in the current budget so as not to affect the overall division between consumption and capital formation. The capital budget in turn should be loan financed so as to allocate part of savings to investment in the public sector.” Following a simpler argument, borrowing for public investment can be justified under the assumption that the yield from such investment is sufficient to meet the resulting debt-service obligation. The application of this rule, however, is plagued with the difficulties of defining and measuring public investment; see Kopits and Craig (1998, Appendix II).
See European Commission (1995).
The government is legally required “to maintain total Crown debt at prudent levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues. .. . In the short term, cyclical factors may well result in temporary, and desirable, surpluses or deficits” see New Zealand Treasury (1995, p. 1). (The major difference between the operating and the overall balance is that under the former—following accrual-based accounting—capital spending is recorded in terms of depreciation allowances.) Initially, this rule was interpreted by targeting a budget surplus, equivalent to 3 percent of GDP, consistent with the target debt ratio.
Under one option under consideration, the rule would require a surplus (in the form of excess revenue) in the event of an above-average GDP growth rate (above 1.8 percent a year) and allow for a deficit (in the form of excess expenditure) if growth were to fall significantly below the average rate (below 0.5 percent a year). See Switzerland, Federal Council (1995).
This proportion, which essentially limits base money creation through the financing of government deficits, is determined by the debt-servicing capacity of the government, as reflected in revenue performance. Alternatively, a few countries set the ceiling in terms of potential revenue or actual expenditure.
A similar legal requirement, to maintain general government debt and contingent liabilities at prudent levels, is under consideration in Australia.
Friedman (1995) favored the U.S. balanced-budget amendment, which, as proposed in 1982, incorporated a revenue limit as a means of containing the size of government spending.
In a Ricardian world, an increase in government saving resulting from an increase in taxes is exactly offset by a decline in private saving. Much of the empirical literature, however, suggests that the world is not altogether Ricardian.
The U.S. multiplier is about 1 in the short run for the spending cut (0.7 for the tax increase), and output is 0.6 above its baseline level in the long run; see IMF (1996a, Annex I). For an illustration of the range of possible outcomes in Germany for the DM 50 billion fiscal retrenchment package, announced in the spring of 1996, see IMF (1996c, Appendix II). The simulations show that the fiscal multiplier for Germany is half that for the United States because of its increased openness. Furthermore, alterations in the speed of fiscal adjustment and the perceived credibility result in the impact multiplier varying between 0.5 and—0.25.
Also, as observed by de Menil (1996), the principal difference between a change in regime—upon adoption of a rule—and an incremental change is that the implications of the new regime are internalized in the behavior of economic agents as soon as they are known, hence the importance of long-term implications of fiscal adjustment in ascertaining the effects of fiscal rules.
However, for U.S. states, Bayoumi, Goldstein, and Woglom (1995) found that interest rates increase between 23 and 35 basis points for every 1 percent increase in the ratio of government debt to gross state product.
For a more detailed and mathematical treatment of stochastic simulations, see Bryant, Hooper, and Mann (1993).
In general, the solution values for any period depend on current shocks as well as on past endogenous variables, which in turn depend on past error terms. For rational-expectations models, such as MULTIMOD, where future policy affects today‘s outcome, solution values can be obtained only by simulating the model over an extended future period, where the terminal date is far enough in the future that the results are independent of the terminal values (55 years, in this paper). When the model is initially solved for period 1, agents are assumed to expect no new shocks in period 2 and beyond; when the period-2 shocks are applied to obtain the solution values for period 2, agents are assumed to expect no shocks in period 3 and beyond; and so on. However, they are aware of the autoregressive nature of contemporaneous shocks.
Although the choice of 360 trials was arbitrary, it is nearly the same number used in Bryant, Hooper, and Mann (1993). Furthermore, the results were invariant to a sample reduction of 50.
In practice, this autoregressive process results in the loss of one or two time-series observations. A practical difficulty is that the number of residuals used in forming the covariance matrix is often greater than the number of observation periods in the historical data sample; thus the matrix cannot be straightforwardly decomposed because it is singular. However, the matrix was inverted by adding a very small number (0.000001) to every element in the main diagonal.
An alternative technique to form expectations and derive the residuals is to rely on whole-model simulations. However, this is a major undertaking and our procedure is analogous to an instrumental-variables approach to this problem.
Bryant and Zhang (1996) show that a rule that imposes a deficit target without a debt stock condition is possibly inconsistent with achieving a long-run steady state. However, in these experiments, the shocks are randomly distributed with zero mean and it is unlikely that the debt dynamics will be explosive.
The historical variation is calculated as the variation in growth rates or as a ratio of GDP over the period 1974–95. On the other hand, the simulation results, which were run over a future time horizon, are reported as the RMSE deviations from the WEO baseline. Although these constructs are not identical, they are conceptually similar since the simulations were run over a future time period, with relatively constant growth rates, constant interest and exchange rates, and variables that are a fixed share of GDP. In our simulations, the RMSE was preferred to the variance since the same WEO base-line is used over and over again in the repeated samples.
Except for the simulation with an asymmetric policy objective, the average deviation from the baseline is nearly zero (and always less than 0.2 standard deviation from zero). This is not surprising since the nonlinearities in MULTIMOD are relatively small and the shocks are taken from a random normal distribution. Therefore, the discussion that follows concentrates on differences in variability.
Although not shown in Table 6, deficits are a little more than 1 percent of GDP lower and debt is over 7 percent of GDP lower than in the baseline scenario.
If the debt rule is defined on a yearly basis in terms of the ratio of debt (D) to actual GDP (Y), it has the potential to be unstable for countries with a large debt stock. In this case, the output effect of contractionary fiscal policy (the second term) might out-weigh the direct decline in D:
This finding is consistent with Masson (1996), Buti, Franco, and Ongena (1997), and IMF (1996c), which examine the implications of the EMU Stability and Growth Pact for EU member countries. Those studies conclude that the probability of violating the 3 percent ceiling is very small if the government targets a structural fiscal position near balance.
Recent Occasional Papers of the International Monetary Fund
162. Fiscal Policy Rules, by George Kopits and Steven Symansky. 1998.
161. The Nordic Banking Crises: Pitfalls in Financial Liberalization? by Burkhard Dress and Ceyla Pazarbasioglu. 1998.
160. Fiscal Reform in Low-Income Countries: Experience Under IMF-Supported Programs, by a staff team led by George T. Abed and comprising Liam Ebrill, Sanjeev Gupta, Benedict Clements, Ronald McMorran, Anthony Pellechio, Jerald Schiff, and Marijn Verhoeven. 1998.
159. Hungary: Economic Policies for Sustainable Growth, Carlo Cottarelli, Thomas Krueger, Reza Moghadam, Perry Perone, Edgardo Ruggiero, and Rachel van Elkan. 1998.
158. Transparency in Government Operations, by George Kopits and Jon Craig. 1998.
157. Central Bank Reforms in the Baltics, Russia, and the Other Countries of the Former Soviet Union, by a staff team led by Malcolm Knight and comprising Susana AlmuiɁa, John Dalton, Inci Otker, Ceyla Pazarbasioglu, Arne B. Petersen, Peter Quirk, Nicholas M. Roberts, Gabriel Sensenbrenner, and Jan Willem van der Vossen. 1997.
156. The ESAF at Ten Years: Economic Adjustment and Reform in Low-Income Countries, by the staff of the International Monetary Fund. 1997.
155. Fiscal Policy Issues During the Transition in Russia, by Augusto Lopez-Claros and Sergei V. Alexashenko. 1998.
154. Credibility Without Rules? Monetary Frameworks in the Post-Bretton Woods Era, by Carlo Cottarelli and Curzio Giannini. 1997.
153. Pension Regimes and Saving, by G.A. Mackenzie, Philip Gerson, and Alfredo Cuevas. 1997.
152. Hong Kong, China: Growth, Structural Change, and Economic Stability During the Transition, by John Dodsworth and Dubravko Mihaljek. 1997.
151. Currency Board Arrangements: Issues and Experiences, by a staff team led by Tomas J.T. BaliɁo and Charles Enoch. 1997.
150. Kuwait: From Reconstruction to Accumulation for Future Generations, by Nigel Andrew Chalk, Mohamed A. El-Erian, Susan J. Fennell, Alexei P. Kireyev, and John F. Wilson. 1997.
149. The Composition of Fiscal Adjustment and Growth: Lessons from Fiscal Reforms in Eight Economies, by G.A. Mackenzie, David W.H. Orsmond, and Philip R. Gerson. 1997.
148. Nigeria: Experience with Structural Adjustment, by Gary Moser, Scott Rogers, and Reinold van Til, with Robin Kibuka and Inutu Lukonga. 1997.
147. Aging Populations and Public Pension Schemes, by Sheetal K. Chand and Albert Jaeger. 1996.
146. Thailand: The Road to Sustained Growth, by Kalpana Kochhar, Louis Dicks-Mireaux, Balazs Horvath, Mauro Mecagni, Erik Offerdal, and Jianping Zhou. 1996.
145. Exchange Rate Movements and Their Impact on Trade and Investment in the APEC Region, by Takatoshi Ito, Peter Isard, Steven Symansky, and Tamim Bayoumi. 1996.
144. National Bank of Poland: The Road to Indirect Instruments, by Piero Ugolini. 1996.
143. Adjustment for Growth: The African Experience, by Michael T. Hadjimichael, Michael Nowak, Robert Sharer, and Amor Tahari. 1996.
142. Quasi-Fiscal Operations of Public Financial Institutions, by G.A. Mackenzie and Peter Stella. 1996.
141. Monetary and Exchange System Reforms in China: An Experiment in Gradualism, by Hassanali Mehran, Marc Quintyn, Tom Nordman, and Bernard Laurens. 1996.
140. Government Reform in New Zealand, by Graham C. Scott. 1996.
139. Reinvigorating Growth in Developing Countries: Lessons from Adjustment Policies in Eight Economies, by David Goldsbrough, Sharmini Coorey, Louis Dicks-Mireaux, Balazs Horvath, Kalpana Kochhar, Mauro Mecagni, Erik Offerdal, and Jianping Zhou. 1996.
138. Aftermath of the CFA Franc Devaluation, by Jean A.P. Clement, with Johannes Mueller, Stéphane Cossé, and Jean Le Dem. 1996.
137. The Lao People‘s Democratic Republic: Systemic Transformation and Adjustment, edited by Ichiro Otani and Chi Do Pham. 1996.
136. Jordan: Strategy for Adjustment and Growth, edited by Edouard Maciejewski and Ahsan Mansur. 1996.
135. Vietnam: Transition to a Market Economy, by John R. Dodsworth, Erich Spitäller, Michael Braulke, Keon Hyok Lee, Kenneth Miranda, Christian Mulder, Hisanobu Shishido, and Krishna Srinivasan. 1996.
134. India: Economic Reform and Growth, by Ajai Chopra, Charles Collyns, Richard Hemming, and Karen Parker with Woosik Chu and Oliver Fratzscher. 1995.
133. Policy Experiences and Issues in the Baltics, Russia, and Other Countries of the Former Soviet Union, edited by Daniel A. Citrin and Ashok K. Lahiri. 1995.
132. Financial Fragilities in Latin America: The 1980s and 1990s, by Liliana Rojas-Suarez and Steven R. Weisbrod. 1995.
131. Capital Account Convertibility: Review of Experience and Implications for IMF Policies, by staff teams headed by Peter J. Quirk and Owen Evans. 1995.
130. Challenges to the Swedish Welfare State, by Desmond Lachman, Adam Bennett, John H. Green, Robert Hagemann, and Ramana Ramaswamy. 1995.
129. IMF Conditionality: Experience Under Stand-By and Extended Arrangements. Part II: Background Papers. Susan Schadler, Editor, with Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James H.J. Morsink, and Miguel A. Savastano. 1995.
128. IMF Conditionality: Experience Under Stand-By and Extended Arrangements. Part I: Key Issues and Findings, by Susan Schadler, Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James H.J. Morsink, and Miguel A. Savastano. 1995.
127. Road Maps of the Transition: The Baltics, the Czech Republic, Hungary, and Russia, by Biswajit Banerjee, Vincent Koen, Thomas Krueger, Mark S. Lutz, Michael Marrese, and Tapio O. Saavalainen. 1995.
126. The Adoption of Indirect Instruments of Monetary Policy, by a staff team headed by William E. Alexander, Tomas J.T. Balino, and Charles Enoch. 1995.
125. United Germany: The First Five Years—Performance and Policy Issues, by Robert Corker, Robert A. Feldman, Karl Habermeier, Hari Vittas, and Tessa van der Willigen. 1995.
124. Saving Behavior and the Asset Price “Bubble” in Japan: Analytical Studies, edited by Ulrich Baumgartner and Guy Meredith. 1995.
123. Comprehensive Tax Reform: The Colombian Experience, edited by Parthasarathi Shome. 1995.
122. Capital Flows in the APEC Region, edited by Mohsin S. Khan and Carmen M. Reinhart. 1995.
121. Uganda: Adjustment with Growth, 1987–94, by Robert L. Sharer, Hema R. De Zoysa, and Calvin A. McDonald. 1995.
120. Economic Dislocation and Recovery in Lebanon, by Sena Eken, Paul Cashin, S. Nuri Erbas, Jose Martelino, and Adnan Mazarei. 1995.
119. Singapore: A Case Study in Rapid Development, edited by Kenneth Bercuson with a staff team comprising Robert G. Carling, Aasim M. Husain, Thomas Rumbaugh, and Rachel van Elkan. 1995.
118. Sub-Saharan Africa: Growth, Savings, and Investment, 1986–93, by Michael T. Hadjimichael, Dhanesh-war Ghura, Martin Muhleisen, Roger Nord, and E. Murat Uçer. 1995.
117. Resilience and Growth Through Sustained Adjustment: The Moroccan Experience, by Saleh M. Nsouli, Sena Eken, Klaus Enders, Van-Can Thai, Jörg Decressin, and Filippo Cartiglia, with Janet Bungay. 1995.
116. Improving the International Monetary System: Constraints and Possibilities, by Michael Mussa, Morris Goldstein, Peter B. Clark, Donald J. Mathieson, and Tamim Bayoumi. 1994.
Note: For information on the title and availability of Occasional Papers not listed, please consult the IMF Publications Catalog or contact IMF Publication Services.