IMF Working Papers

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

By Francesca Caselli, Julien Reynaud

March 5, 2019

Download PDF Order a Print Copy
Order a Print Copy

Preview Citation

Format: Chicago

Francesca Caselli, and Julien Reynaud. Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy, (USA: International Monetary Fund, 2019) accessed December 26, 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

You May Also Be Interested In...

How Has Dollarization Served Timor-Leste So Far?

December 20, 2024

A Confidence-Financial Inclusion Nexus in the Caucasus and Central Asia?

December 20, 2024

Islamic Republic of Mauritania: Staff Report for the 2024 Article IV Consultation, Third Review Under the Arrangements Under the Extended Credit Facility and Extended Fund Facility, Request for Modification of Quantitative Performance Criteria, and Second Review Under the Resilience and Sustainability Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania

December 20, 2024

Gulf Cooperation Council: Pursuing Visions Amid Geopolitical Turbulence: Economic Prospects and Policy Challenges for the GCC Countries

December 19, 2024