The Impact of Fiscal Rules on Economic Stabilization in Taiwan

Abstract

This study is to construct the national fiscal rule index for Taiwan and investigate the impacts of fiscal rules on stabilizing the economy in Taiwan. We follow the pattern of fiscal rules published by the International Monetary Fund and adopt the methods of Schaechter et al. (2012) and Nerlich and Reuter (2012) to construct the fiscal rules index for Taiwan. The autoregressive distributed lag model is utilized to examine the impact of fiscal rules on the pro-cyclicality of fiscal policy. The empirical result shows that fiscal rules index has a significantly negative impact on the pro-cyclicality of government expenditures in Taiwan over the period of 1985–2018. The finding of this study indicates that fiscal rules in Taiwan support counter-cyclical fiscal policy, that is, fiscal rules facilitate to stabilize the economy during the business cycle.