We review the theoretical and empirical literature on the benefits and costs of imposing restrictions on fiscal policy. We emphasize that the arguments in favour of restricting discretion of fiscal policy go beyond the notion of avoiding unsustainable budgetary plans that can lead to pressure on the central bank. Restrictions on fiscal policy can also be justified on the grounds that discretionary changes in spending or taxes can lead to unnecessary volatility in output and lower economic growth. Empirically, there is evidence that implicit constraints on governments can be as effective as explicit constraints (i.e. rules). From the analysis in EMU (European Monetary Unit) countries in the last 10 years we conclude that there has been a significant change in the conduct of fiscal policy in terms of increased discipline and less use of discretion. However, since 1999 there are clear signs of fatigue in this process as previous trends have either stopped or even reversed.
