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The effects of fiscal rules on budget deficit: Does democracy matter?

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  • Nomo Beyala, Bernard Clery
  • Fouda Owoundi, Jean Pierre

Abstract

This paper aims to analyse the extent to which democracy shapes the relationship between fiscal rules and budget deficits. To attain this objective, we estimated different fiscal reaction functions for a sample of 97 countries over the period 1985–2021. Our results show that fiscal rules reduce primary budget deficits. Furthermore, the paper establishes that this effect diminishes with democracy as a marginal increase in fiscal rules strength reduces the primary budget only in weak democracies while in strong democracies they do not, indicating that fiscal rules and democracy are substitutes to attain fiscal discipline. Our results are robust to the exclusion of EU countries members, alternative methods dealing with endogeneity or time-invariant variables and the inclusion of other determinants of primary budget deficit as explanatory variables. This suggests that fiscal rules and democracy are substitutes. However, when dealing with the fiscal framework, we find that fiscal rules and democracy are substitutes only in new democracies and under high indebtedness.

Suggested Citation

  • Nomo Beyala, Bernard Clery & Fouda Owoundi, Jean Pierre, 2025. "The effects of fiscal rules on budget deficit: Does democracy matter?," Journal of Comparative Economics, Elsevier, vol. 53(1), pages 290-315.
    • Handle: RePEc:eee:jcecon:v:53:y:2025:i:1:p:290-315
    DOI: 10.1016/j.jce.2025.01.005
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    More about this item

    Keywords

    Budget deficit; Fiscal sustainability; Fiscal rules; Democracy;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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