Individual Treatment Effects of Budget Balance Rules

IMF Working Papers, December 11, 2020

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This paper investigates the heterogenous effects of budget balance rules on fiscal policy in a large sample of countries.
To derive country-specific treatment effects of fiscal rules and conduct inference, the authors use a Synthetic Difference-in-Differences Method.
The paper reports that countries with a budget balance rule improve their fiscal balance on average by around 3 percent after its introduction.
The paper emphasizes that the average treatment effect masks significant heterogeneity in the country-specific impact of the rule.

Countries that would have had large deficits in the absence of the fiscal rule exhibit positive treatment effects, thus reducing their budget deficits.
Countries with budget surpluses respond to fiscal rules by reducing their budget surplus and moving closer to the numerical target of the rule.
Rules’ design matters:
- A small overall number of fiscal rules improves the effectiveness of the rules.
- The presence of a monitoring process outside the government, especially at the supra-national level, improves the effectiveness of the rules.

Method used: Synthetic Difference-in-Differences Method.
Objective: derive country-specific treatment effects and conduct inference on fiscal rules’ impacts.

Evaluations of fiscal rules should go beyond average treatment effects to account for heterogeneous country-specific impacts.
Design features that strengthen effectiveness include:
- Limiting the overall number of fiscal rules.
- Establishing monitoring processes outside the government, notably at the supra-national level.