Fiscal Rules of Expenditure Growth - A Nominal or Real Approach?
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Publication date: 2003-10-25
GNPJE 2003;187(10):1–20
The aim of this study is to analyse chances for pursuing short-term anticyclical policy under conditions of fiscal policy rules applied to expenditure growth. Two versions of expenditure rules are analysed, differing from each other in terms of assumptions concerning the growth rate of prices. The consequences of applying both versions to short-term stabilisation of the economy are examined on a basis of a simple AS-AD model. The analysis indicates that under conditions of demand shocks the nominal approach to the rise in expenditure has a stronger stabilising effect on both the product and price levels. Under conditions of supply shocks the real-terms approach to the rise in expenditure proves more effective for stabilisation of the production level. This, however, takes place at the expense of more intensive price fluctuations.