Webex-seminar: Do fiscal rules need budget transparency to be effective?

We examine whether fiscal rules improve fiscal discipline and whether the effect of these rules is conditional on the degree of budget transparency. To investigate this, we use data for fiscal rules and budget transparency of 65 advanced and developing economies over the years 2003-2013. Our results suggest that fiscal rules lower budget deficits. Furthermore, we find that fiscal rules stimulate the implementation of fiscal adjustments and increase their success in reducing government indebtedness. However, we also find that fiscal rules are only effective in shaping fiscal behavior if governments are transparent about the fiscal position of the country. Our findings therefore provide support for the theoretical argument that the effect of fiscal rules is likely to depend on the ability to monitor the fiscal policies pursued by the government and thus shed light on the pivotal role of budget transparency in clearing the smokescreens surrounding the country’s fiscal stance.