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I would like to thank Benjamin Hunt, James Morsink, and the seminar participants at the Central Bank of Iceland, for helpful comments.
In this analysis, stringency of fiscal rules means more encompassing aggregates for which targets are set, longer forecast horizons, more elaborate forecasts, and higher political commitments. Budgetary centralization refers to budget formulation, approval, and implementation.
Here, “strength” encompasses such factors as the statutory base of the rule, the nature of the bodies charged with monitoring and enforcing the rule, the enforcement mechanism, and media visibility of the rule.
This is defined as the change in the deviation of the ratio of private consumption to potential output from its 25-year average.
The data source and variable definitions derive from the World Bank’s Database of Political Institutions.
Note that government fractionalization and the size of government majority measure different dimensions of common pool pressures and are only weakly correlated (0.44).
Over the four years 2002–05, expenditure surpassed budgeted amounts by 12 percent, 8 percent, 9 percent and 4 percent, respectively.
Supplementary budgets are supposed to be limited to exceptional circumstances, in cases where “unforeseen circumstances, wage agreements, or new legislation make it necessary to resort to special fiscal measures not anticipated in the fiscal budget for the year” (Government Financial Reporting Act, 1997, Article 44).