The welfare and stabilization befits of fiscal rules: Evidence from Canadian provinces

• Author(s) / Creator(s)

  • Landon, Stuart
  • Smith, Constance E.

• The growth of debt and deficits in developed countries has led many states to consider the adoption of fiscal rules. There is little evidence on the benefits of different types of rules. This study uses Monte Carlo techniques to examine the impact on welfare and government spending stabilization of five types of government expenditure rules. The simulation employs a three-variable VAR estimated using data for the Canadian provinces. The use of a VAR captures the interactive effects between spending under the fiscal rule, output and revenue.

  The best fiscal rules reduce government expenditure volatility by about half relative to a balanced budget rule. The stabilization benefit is about twice as great for the three provinces with more resource-based and volatile revenue — Alberta, Saskatchewan and Newfoundland. Some fiscal rules lead to an unsustainable path for government debt or assets under many simulations due to an absence of feedback from the stock of debt or assets to current expenditure. We find that a simple rule, where government expenditure is based on the moving average of past government revenue, is one of the better performing rules and yields a level of expenditure stabilization and a welfare gain similar to the more complicated “debt brake” rule adopted by Switzerland and other countries. The Swiss rule requires forecasts for revenue and output, and its greater complexity may make it more difficult to implement, monitor, and communicate to the public.

• Date created

  2015-09-11

• Subjects / Keywords

  • Fiscal Policy
  • Stabilization
  • Government Spending
  • Fiscal Rules
  • Canadian Government Economic Policy

• Type of Item

  Conference/Workshop Presentation

• DOI

  https://doi.org/10.7939/R3JH3DJ84

• License

  © The Authors. Papers may be downloaded for personal use. Downloading of papers for any other activity may not be done without the written consent of the authors.