Research Insights: How Can Policymakers Make Fiscal Rules More Effective?

Despite the relative popularity of fiscal rules, they are per se, no panacea for improving fiscal performance. Fiscal rule effectiveness is enhanced when policymakers consider i) the quality of rule design; ii) supporting mechanisms to boost compliance and provide a forward-looking orientation to fiscal policy; iii) the impact of rules on different dimensions of public finances, such as the composition of public spending; and iv) clear, ex-ante guidance for the return to fiscal rule compliance after invoking an escape clause. There is ample space to improve rule-based fiscal frameworks in emerging markets.