Fiscal rule as an economic policy tool: The sample of Turkey and other selected OECD countries

Fiscal rules, imposing numerical limits on fiscal variables, are extensively analyzed in economics literature. Economic crises and wrong economic policies led to a rise in budget deficits and public sector debts in many countries. Due to two way causality between budget deficit and public sector debt, deficit and debt grow in a self-feeding manner. To solve this problem, governments in many countries implement fiscal rules. Fiscal rules are grouped into four categories in the related literature: Budget balance rules, debt rules, expenditure rules, and income rules. The purpose of this study is to test the effect of each fiscal policy rule variable on macroeconomic performance variables and determine the results of fiscal policy rules followed in 24 OECD countries and Turkey. In this framework, we have chosen four fiscal rule variables, one from each category, and four macroeconomic performance variables. Macroeconomic performance variables are growth rate of real gross domestic product, inflation rate, unemployment rate, and current account deficit. We use panel data regression modeling and cover 1994-2010 period in the study. One of the main findings of the study is the fact that each country follows a different fiscal rule on the basis of its own specific economic conditions. Another important finding of the study is that fiscal rules help reducing budget deficits, controlling public sector debts, improving the productivity of public expenditures, and enhancing the efficiency of the distribution of public sector incomes. Keywords: Economic policy, fiscal policy, fiscal rule, Turkey, OECD countries.