Fiscal rules and economic cycles: Quality (always) Matters

Abstract

This paper investigates the role of fiscal rules in managing public debt, particularly focusing on their efficacy during different phases of economic cycles. Analyzing Balance, Expenditure, and Debt Fiscal Rules, the study finds that their impact on debt reduction is significantly influenced by the quality of the fiscal framework and the economic cycle phase. Moreover, factors like legal basis, procedural framework, and political stability are identified as key to ensuring compliance with fiscal objectives. Our results suggest that fiscal rules are most effective in reducing debt during positive economic cycles, with the design and institutional support playing a crucial role. This has important policy implications, particularly in the context of the debt increase after the Covid-19 pandemic.