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Public Choice

, Volume 178, Issue 1–2, pp 3–30 | Cite as

Valuable legacy? The effect of inherited fiscal rules

  • Csaba G. TóthEmail author
Article
  • 60 Downloads

Abstract

The working mechanism of national fiscal rules depends strongly on whether a government must comply with its own rules or inherited ones. In the former case, a government usually introduces fiscal rules to show its commitment to a disciplined fiscal policy (the signaling function). In the latter context, however, inherited rules constitute external obstacles to budgetary policymaking (the limiting function). This study mainly is concerned with the limiting function and therefore bases its empirical analysis on periods when the ruling government inherited fiscal rules introduced by a previous government. The results of a panel-data econometric study indicate that national fiscal rules do contribute to disciplined fiscal policy after a change in government in times of an economic upturn. That finding, however, does not mean that the signaling function is ineffective: quite the contrary. My results, in line with the literature, indicate that the double functions of rules may complement one another. A government that introduces such rules is often already committed to a disciplined policy and wishes to signal such commitment in the short term. With the appearance of new government, however, the function of rules changes, and they efficiently promote disciplined fiscal policy in the long term.

Keywords

Fiscal policy Fiscal rules Fiscal discipline Political economy 

JEL Classification

H60 H62 E62 

Notes

Acknowledgements

The views expressed are those of the author and do not necessarily reflect the official view of the Central Bank of Hungary. The author uses the opportunity to express his thanks to János Ádám, Anna Adamecz, András Balatoni, István Benczes, Dávid Berta, Pál Czeglédi, László Jankovics, Tamás Jenei, Zalán Kocsis, László Muraközy, Judit Neményi, and Gábor Oblath for all their useful advice. The author is also grateful to the anonymous referees, whose comments on various drafts have substantially improved the paper. All errors are my own.

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© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Central Bank of HungaryBudapestHungary

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