Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to Do with Them?

By Leandro Medina, Carlos Caceres, Ana Corbacho

November 1, 2010

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Leandro Medina, Carlos Caceres, and Ana Corbacho. Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to Do with Them?, (USA: International Monetary Fund, 2010) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In recent years, many countries have adopted Fiscal Responsibility Laws to strengthen fiscal institutions and promote fiscal discipline in a credible, predictable and transparent manner. Still, results on the effectiveness of these laws remain tentative. In this paper, we test empirically whether fiscal performance, measured as the level of primary fiscal balances and their volatility, indeed improved after the implementation of Fiscal Responsibility Laws in a sample of Latin American and advanced economies. We show that traditional econometric approaches, which rely on the use of dummies in time series or panel regressions, yield biased estimates. In contrast, our empirical strategy recognizes that, a priori, the timing of the effect of these laws on fiscal performance is unknown, while controlling for the impact of the business and commodity cycles on fiscal outcomes. Overall, we find limited empirical evidence in support of the view that Fiscal Responsibility Laws have had a distinguishable effect on fiscal performance. However, Fiscal Responsibility Laws could still have other positive effects on the conduct of fiscal policy not analyzed here, for instance, through enhanced transparency and guidance in the budget process and lower risk premia.

Subject: Fiscal policy, Fiscal stance, Markov-switching models, Output gap, PFM legal and regulatory frameworks

Keywords: FRL dummy, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/248
Stock No:

WPIEA2010248
ISBN:

9781455209484
ISSN:

1018-5941

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