The impact of national fiscal rules and government effectiveness on the procyclicality of fiscal policy in the Asia-Pacific countries

Abstract

Fiscal rules are institutional approaches aimed at maintaining fiscal credibility and fiscal discipline and usually set a numerical indicator. Currently, there are two sources of fiscal rules. One is the International Monetary Fund (IMF) dataset that provides country-specific details on various characteristics of rules for 96 countries and the other is European Commission – numerical fiscal rules index that provides the fiscal rule index for 28 member countries. Because of the lack of fiscal rule index for the Asia-Pacific countries, the purpose of this study is to construct the fiscal rule index for 8 Asia-Pacific countries from 1996 to 2015 by using the IMF dataset. Then, this study utilizes the Panel Generalized Method of Moments and the constructed fiscal rule index to investigate the impact of fiscal rules and government effectiveness on the procyclicality of fiscal policy in 8 Asia-Pacific countries, classified as “advanced economies” and “emerging economies”. The empirical results show that fiscal rules and government effectiveness are effective in reducing the procyclicality of government expenditure only in advanced economies. Additionally, the interaction of fiscal rules and government effectiveness has a negative impact on the procyclicality of government expenditure for both advanced economies and emerging economies but the effect is not significant in emerging economies.