A set of estimated fiscal rules for a cross-section of countries: Stabilization and consolidation through which instruments?

Not much cross-country evidence exists on the time-series behavior of individual fiscal instruments in response to the public debt and to output. To remedy this situation, this study provides a set of detailed estimated fiscal reaction functions (or “fiscal rules”) governing these responses for a panel of twenty OECD countries. A number of commonalities and differences emerge. In general, the countries in the panel adjust tax revenues strongly in response to the public debt, and they adjust tax revenues and transfer payments but, interestingly, not tax rates or government purchases, strongly in response to output. Furthermore, a high rate of transfer payments is associated in the cross-section with reduced output volatility. These results support some recent developments in the theoretical literature, namely, an increased emphasis on the effects of countercyclical transfer payments as an anti-cyclical fiscal policy instrument.