IMF Working Papers

Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy

By Francesca Caselli, Julien Reynaud

March 5, 2019

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Francesca Caselli, and Julien Reynaud. Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy, (USA: International Monetary Fund, 2019) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper estimates the causal effect of fiscal rules on fiscal balances in a panel of 142 countries over the period 1985-2015. Our instrumental variable strategy exploits the geographical diffusion of fiscal rules across countries. The intuition is that reforms in neighboring countries may affect the adoption of domestic reforms through peer pressure and imitational effects. We find that fiscal rules correlate with lower deficits, but the positive link disappears when endogeneity is correctly addressed. However, when considering an index of fiscal rules’ design, we show that well-designed rules have a statistically significant impact on fiscal balances. We conduct several robustness tests and show that our results are not affected by weak instrument problems.

Subject: Econometric analysis, Estimation techniques, Fiscal policy, Fiscal rules, Fiscal stance, Inflation targeting, Monetary policy

Keywords: Core European Union country, Estimation techniques, Fiscal balances, Fiscal rule, Fiscal rules, Fiscal stance, Global, Inflation targeting, Instrument variable (IV) estimation, Outcome variable, Rule dummy, Rule effectiveness, Strength index, Treatment effect technique, WP

Publication Details

  • Pages:

    27

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/049

  • Stock No:

    WPIEA2019049

  • ISBN:

    9781498300865

  • ISSN:

    1018-5941

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