A stringent necessity: addressing fiscal bubbles with fiscal rules in Central and Eastern Europe

Jerome Creel, Marek A. Dąbrowski, Etienne Farvaque, Jakub Janus and Piotr Stanek

Post-Communist Economies, 2025, vol. 37, issue 1-2, 21-50

Abstract: We study the role of public debt sustainability in the implementation of national fiscal rules across 11 Central and Eastern European (CEE) countries. We ask whether episodes of unsustainable surges in public debt, i.e. ‘fiscal bubbles’, lead to adjustments in fiscal frameworks in CEE economies. We model how the costs and benefits of fiscal rules explain why politicians select different levels of fiscal stringency and, crucially, how fiscal bubbles bolster politicians’ willingness to tighten fiscal rules via the perception and social pressure channels. On the empirical side, employing a bubble detection algorithm, we identify episodes of explosive public debt behaviour between 2000 and 2021. Panel fractional probit models reveal that (i) the occurrence of fiscal bubbles increases the propensity of a government to enhance fiscal rule stringency, (ii) the beneficial effects of fiscal bubbles are decreasing in government effectiveness, suggesting that the perception channel likely dominates the social pressure channel.

Date: 2025
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Working Paper: A stringent necessity: Addressing fiscal bubbles with fiscal rules in Central and Eastern Europe (2023)
Working Paper: A stringent necessity: Addressing fiscal bubbles with fiscal rules in Central and Eastern Europe (2023)
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DOI: 10.1080/14631377.2024.2437735

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