The Credibility of Fiscal Rules Policy and Business Cycle Volatility

The Credibility of Fiscal Rules Policy and Business Cycle Volatility

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The aim of this paper is two-fold; first, it studies the impact of the credibility of fiscal rule policy on the stability of output growth; second, it compares the effectiveness of fiscal rule policy to discretionary and automatic stabilizer fiscal policies to address the fluctuation of output growth.Employing quarterly data over Beanie Hat the period 2001-2013 in the case of Indonesia, we obtain that the credible debt rule leads to a decrease in the volatility of output growth while the non-credible deficit rule does not have any effect.Both Decor unsystematic and systematic components of discretionary fiscal policy have a stabilizing function.Interestingly, the automatic stabilization tends to induce the volatility of output growth.Given those results, we infer that government spending is not a good automatic stabilizer.

It seems that the lower ratio of government expenditure to GDP along with improving credibility of deficit rule policy has a smoother effect on the economy.Therefore, they implicitly support expenditure cuts when implementing fiscal adjustment with the purpose of reaching fiscal sustainability in the short-run and a stable economic growth in the long-run.