Natural Disaster-Resilient Fiscal Rule: The Third-Generation Fiscal Rule

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Based on the author’s discussion with policy-makers in the small islands in the Pacific region, our rules are much more practically and operationally useful for small states than any other existing fiscal rules. Our main argument is that the natural disaster-resilient fiscal rule (and the recurrent expenditure rule) is the most practically useful fiscal rule for small states as a countercyclical policy tool to handle natural disasters, volatile resource revenues, and uncertain foreign grants. An advantage of practical feasibility should be tested by implementing our third-generation fiscal rule, especially the natural disaster-resilient fiscal rule, by the fiscal authorities in the small states in the Pacific, Caribbean, or Indian Ocean.

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