Bunching at 3 Percent: The Maastricht Fiscal Criterion and Government Deficits

40 Pages Posted: 22 Aug 2018

See all articles by Francesca Caselli

Francesca Caselli

International Monetary Fund (IMF)

Philippe Wingender

International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: August 2018

Abstract

This paper estimates the effects of the Maastricht treaty's fiscal criterion on EU countries' general government deficits. We combine treatment effects methods with bunching estimation, and find that the 3 percent deficit rule acts as a 'magnet', increasing the number of observations around the threshold, while reducing the occurrence of both large government deficits and surpluses. After the rule is adopted, the distribution of government deficits among EU countries displays 20 percent excess mass around the deficit ceiling compared to a counterfactual distribution in which countries have the same observable characteristics but without the fiscal rule. Most of the bunching response comes from a reduction in the number of high deficit observations. We also find that the average treatment effect on fiscal deficits is positive and statistically significant. Finally, we derive country-specific impacts under a rank invariance assumption and find that all EU countries have seen their fiscal position improve on average as a result of the deficit rule.

Keywords: Fiscal rules, Fiscal policy, bunching estimation, treatment effects, Deficit

JEL Classification: H62, E61, E62, C31, C14

Suggested Citation

Caselli, Francesca and Wingender, Philippe, Bunching at 3 Percent: The Maastricht Fiscal Criterion and Government Deficits (August 2018). IMF Working Paper No. 18/182. Available at SSRN: https://ssrn.com/abstract=3236798

Francesca Caselli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Philippe Wingender

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States
202-623-9831 (Phone)
202-623-4199 (Fax)

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