Effects of Fiscal Rules on the Fiscal Policy Reaction to Government Indebtedness

It is well known that fiscal policy is prone to react to public debt in order to ensure fiscal sustainability. This paper examines whether and how fiscal rules would exert an influence on this relationship. Our dataset consists of 28 OECD member countries over the period from 1985 to 2015. Our empirical evidence suggests that the reaction of fiscal policy to public debt is likely to become weak or even disappear when strong fiscal rules are in place. At the same time, fiscal rules exert significant disciplinary effects unless public debt exceeds a certain level. Governments need to lower public debt to a certain level in order to ensure the disciplinary effects of the fiscal rules and public debt itself.