Stabilizing, neutral or destabilizing? The impact of fiscal rules on the GDP volatility in the EU countries

Abstract

The goal of the present article is to estimate the impact of numerical fiscal rules on the volatility of GDP growth in the European Union countries in 1995–2019 to answer the question about their counter--cyclical and stabilizing properties. The obtained results show that the introduction and the wider use of fiscal rules in the EU countries reduced economic fluctuations – an increase in the Fiscal Rules Index of one standard deviation was associated with a decrease in the volatility of the GDP growth rate of approximately 20%. When analysing different types of fiscal rules existing in the EU countries, the biggest reduction in GDP volatility was obtained for countries where debt rules were in force. In the case of “operational” rules, the budget balance rules have a stronger impact on limiting GDP growth fluctuations, while the impact of expenditure rules in this matter turned out to be insignificant.