How to limit fiscal procyclicality: the role of exchange rate regimes, fiscal rules and institutions

We explore how fiscal rules, exchange rate regimes and institutional quality affect the cyclical behaviour of scal policy (i.e how government spending responds to GDP fluctuations). We perform our analysis on a panel of 153 advanced, emerging and developing countries over the period 1993-2015 using LGWOLS and 2SLS estimators. We find that the adoption of fiscal rules alone is not suffcient to promote counter-cyclical fiscal policy and should be combined with strong institutions. Moreover, fiscal rules seem to limit procyclicality espcially in countries with exible exchange rate regimes rather than in countries with fixed exchange rates. We also find that the disciplining effect of sfical rules depends on the type of rule.