Do fiscal rules cause better fiscal balances? A new instrumental variable strategy

Francesca Caselli and Julien Reynaud

European Journal of Political Economy, 2020, vol. 63, issue C

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 the mere existence of fiscal rules correlates with lower deficits, but the positive link disappears when endogeneity is correctly addressed. However, when considering the strength of rules through a continuous 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 generally robust and not affected by weak instrument problems.

Keywords: Instrument variable (IV) estimation; Fiscal rules; Fiscal balances (search for similar items in EconPapers)
JEL-codes: C26 E62 H30 H60 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (59)

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Working Paper: Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:63:y:2020:i:c:s0176268020300215

DOI: 10.1016/j.ejpoleco.2020.101873

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