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Luc Eyraud, Andrew Hodge, Mr. John Ralyea, and Julien Reynaud

jurisdictions. Some German landers follow this approach ( Deutsche Bundesbank 2017 ). As a first step, the general government CAB is computed using the national output gap. It is then divided into a central government component and a subnational component, by splitting the budget semi-elasticity parameter (which estimates the sensitivity of the budget balance to the output gap) into two values—one for the central government and one for all subnational governments considered as a whole. The second step is to divide the subnational component of the general government CAB among

Luc Eyraud, Andrew Hodge, Mr. John Ralyea, and Julien Reynaud
This note discusses how to design subnational fiscal rules, including how to select them and calibrate them. It expands on the guidance provided at the national level on rule selection and calibration in IMF (2018a) and IMF (2018b). Thinking on subnational fiscal rules is still evolving, including their effectiveness (for example, Heinemann, Moessinger, and Yeter 2018; Kotia and Lledó 2016; Foremny 2014), and this note only provides a first analysis based on international experiences and the technical assistance provided by the IMF. Main findings are summarized in Box 1. The note is divided into five sections. The first section defines fiscal rules. The second section discusses the rationale for subnational rules. The third section provides some guidance on how to select the appropriate rule(s) and whether they should differ across individual jurisdictions. The fourth section explores the issue of flexibility by looking at how rules should adjust to shocks. Finally, the last section focuses on the “calibration” of the rules.
International Monetary Fund. European Dept.

) Sources: OECD, WEO, IMF Staff Calculations. Notes: SNG = subnational government CG = central government CAB = cyclically adjusted balance. All variables are expressed as a percentage of potential GDP. CABs for all levels of government were computed using a standard assumption of unitary elasticity of revenues (including shared taxes) to the output gap, and zero elasticity of spending, non-tax revenue and intergovermental transfers. The uniform methodology is adopted to avoid statistical discrepancies created by differentiated assumptions across countries. 9

Klaus Schmidt-Hebbel

) reviews the relative advantages of different fiscal rules, their design and complementarity with other institutional changes, the institutional prerequisites and economic determinants, and the strength in design, execution, and correction of deviations. It also positively assesses the fiscal and macroeconomic effects of fiscal rules in the world. As noted previously, Chile is among the 10 countries with a fiscal rule that aims at stabilizing government CABs. However, in contrast to the other 9 cases, Chile corrects not only for the cyclical influence of the business

Mr. Philip R. Gerson and Mr. Manmohan S. Kumar

. Notes: For the United States and Ireland, the data are adjusted to exclude financial sector support recorded above the line. For the United States, data are for federal government in calendar years. For the United Kingdom, data are in fiscal years. For the Russian Federation, authorities’ plans refer to the federal government. CAB based on authorities’ information where available. Where unavailable, it is based on cyclical adjustment using standard elasticities and the output gap. Output gap is as estimated by authorities, or projections of the output gap (based on