Do fiscal rules constrain political budget cycles?

Abstract

We ask whether fiscal rules constrain incumbents from using fiscal policy tools for reelection purposes. Using data on fiscal rules provided by the IMF for a sample of 77 (advanced and developing) countries over the 1984–2015 period, we find that strong fiscal rules dampen political budget cycles. Our results are remarkably robust against inclusion of media freedom and the level of government debt as explanatory variables. Furthermore, we find a strong effect of fiscal rules in, amongst others, countries with fewer veto players, left-wing governments, established democracies, and more globalized economies. In addition, the effect of fiscal rules on political budget cycles seems to be stronger after the global financial crisis, reflecting post-crisis expansion in the number of countries with strong fiscal rules, notably in the European Union.