Individual Treatment Effects of Budget Balance Rules

27 Pages Posted: 26 Jan 2021

See all articles by Francesca Caselli

Francesca Caselli

International Monetary Fund (IMF)

Daniel Stöhlker

CESifo (Center for Economic Studies and Ifo Institute)

Philippe Wingender

International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: December 1, 2020

Abstract

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, we use a Synthetic Difference-in-Differences Method. Our results indicate that countries with a budget balance rule improve their fiscal balance on average by around 3 percent after its introduction. However, our results also illustrate the importance of going beyond the average treatment effect, as it masks significant heterogeneity in the country-specific impact of the rule. We find that countries that would have had large deficits in the absence of the fiscal rule exhibit positive treatment effects, thus reducing their budget deficits. On the other hand, countries with budget surpluses respond to fiscal rules by reducing their budget surplus and moving closer to the numerical target of the rule. Our results also suggest that rules' design matters: a small overall number of fiscal rules, and the presence of a monitoring process outside the government, especially at the supra-national level, improve significantly the effectiveness of the rules.

JEL Classification: E61, E62, H62, C33, H61, H63

Suggested Citation

Caselli, Francesca and Stöhlker, Daniel and Wingender, Philippe, Individual Treatment Effects of Budget Balance Rules (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3772478 or http://dx.doi.org/10.2139/ssrn.3772478

Francesca Caselli (Contact Author)

International Monetary Fund (IMF) ( email )

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

Daniel Stöhlker

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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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