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

28 Pages Posted: 8 Apr 2019

See all articles by Francesca Caselli

Francesca Caselli

International Monetary Fund (IMF)

Julien P. M. Reynaud

International Monetary Fund (IMF); Université Paris I Panthéon-Sorbonne

Date Written: March 2019

Abstract

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.

Keywords: Fiscal rules, Fiscal balance, Fiscal consolidation, Fiscal framework, Fiscal sustainability, Instrument variable (IV) estimation, Fiscal rules, Fiscal balances., endogeneity, instrumental variable, neighbor country, domestic reform, robustness

JEL Classification: C26, E62, H30, H60, E01, E52, H61, C43

Suggested Citation

Caselli, Francesca and Reynaud, Julien P. M., Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy (March 2019). IMF Working Paper No. 19/49. Available at SSRN: https://ssrn.com/abstract=3367434

Francesca Caselli (Contact Author)

International Monetary Fund (IMF) ( email )

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

Julien P. M. Reynaud

International Monetary Fund (IMF) ( email )

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

Université Paris I Panthéon-Sorbonne ( email )

Maison des Sciences Economiques
106-112, Bd. de l'Hôpital
75647 Paris Cedex 13
France

HOME PAGE: http://team.univ-paris1.fr/teamperso/reynaud/julien.htm

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