The Impact of Federal Fiscal Rules on Debt: Insights from the European Union Countries

Abstract

This study analyzes the impact of federal fiscal rules on government debt in European Union countries. We describe the growth and institutional reforms of fiscal rules in European Union countries and conduct an empirical analysis to examine their impact on central government debt to draw comparative implications for federal fiscal rules in the United States. Our empirical results suggest that more stringent expenditure rules can reduce central or federal government debt relative to GDP, while other types of fiscal rules are found to be insignificant. We also find that certain design and structural features of fiscal rules are more important than others. Our findings offer timely and pertinent policy implications for the mounting federal budget and debt challenges of the United States.