## _wp1608 - 9.1 Robustness ## Source details **Canonical URL:** [_wp1608 - 9.1 Robustness](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1608.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1608.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1608.pdf.json) --- ### Introduction and research questions - Tension: calls for activist, countercyclical fiscal policy versus strengthening fiscal rules to ensure fiscal discipline. - Paper expands understanding of links between fiscal rules and the cyclicality of fiscal policy on three fronts: - Differentiate among types of fiscal rules and whether more flexible rules are associated with more or less cyclicality. - Compare cyclicality of overall spending versus investment spending. - Use propensity scores-matching techniques to address self-selection in the adoption of fiscal rules. ### Empirical approach, data, and rule definitions - Panel: unbalanced panel of 167 countries over 1990–2012; 82 countries had fiscal rules in place for at least one year between 1990 and 2012. - Main outcome: country-specific, time-varying cyclicality coefficients (β_it) estimated via Local Gaussian-Weighted OLS (LGWOLS) from: - Equation (1): Δlog G_it = α_it + B_it Δlog Y_it + ε_it - Extended specification (Equation (2)): includes lagged dependent variable, 2SLS (Δlog Y instrumented by lags), and covariates X_it (including lagged debt-to-GDP ratio, government stability, volatility of terms of trade, trade openness, financial openness, inflation). - Interpretation: β_it < 0 indicates countercyclical spending; β_it > 0 indicates procyclical spending. - Propensity score matching (PSM) framework: - Seven matching algorithms: nearest-neighbor (n=1, n=3), radius matching (r = 0.01, 0.03, 0.05), local linear regression, and (Epanechnikov) kernel matching. - Bootstrapped standard errors with 500 replications. - Diagnostics: standardized bias, p-values, Rosenbaum bounding sensitivity tests. ### Counts and stylized facts (1990–2012) - Fiscal rule types and counts (over 1990–2012; Table 1 summary): - Countries with fiscal rules: 80 (as of end 2012); 85 (over minimum one year over 1990–2012) — sample columns show 77 and 82 respectively. - Budget balance rules (BBRs): 64 (as of end 2012); 77 / 74 (world/sample over minimum one year). - Debt rules (DRs): 65 / 64. - Expenditure rules (ERs): 24 / 29. - Revenue rules (RRs): 7 / 7. - Investment-friendly rules (narrow definition): 19 / 23. - Investment-friendly rules (broad definition: IRs): 31 / 36. - Cyclically-adjusted balance rules (CARs): 14 / 15. - Rules containing well defined escape clauses (CRs): 45 / 45. - By 2012, 63 countries (close to 80 percent of those using fiscal rules) had some form of flexibility: - 45 with escape clauses, 31 excluding investment or other priority spending, 14 with cyclically-adjusted or structural targets. - Stylized empirical patterns (1990–2012): - Total public spending: on average countercyclical in both FR and non-FR countries (negative coefficients), stronger countercyclicality in FR countries. - Investment spending: procyclical in both groups but more procyclical in FR countries. - Adoption of fiscal rules associated with strengthened countercyclicality of total spending and reduced procyclicality of investment spending; investment-friendly rules show more marked changes. CARs and CRs show mixed patterns. ### Propensity score estimation (selected probit results) - Probit estimations (2,618 observations; Pseudo R2 for FR = 0.281) — selected significant coefficients for FR column: - Log. Debt-to-GDP ratio (lagged): -0.096*** (standard error 0.037). - Growth instability: -0.132*** (0.051). - Economic growth: 0.088* (0.053). - Inflation rate: -0.469*** (0.066). - Government stability: 0.538*** (0.203). - Degree of democracy: 2.104*** (0.124). - Presidential-type regime: -0.232*** (0.075). - Majoritarian election rule: -0.269*** (0.086). - Federal State: 0.407*** (0.082). - Currency Union member: 1.206*** (0.075). ### Matching results — main treatment effects (selected ATT examples) - All fiscal rules (Table 3): - Procyclicality of Total Public Spending ATT: negative and occasionally significant; examples: - -0.188** (radius r=0.03) - -0.272*** (local linear regression) - Procyclicality of Public Investment Spending ATT: negative, larger magnitude, significance varies; example: - -0.508** (local linear regression) - Rosenbaum Bounds Sensitivity Tests reported range: 1.7 to 3. - Budget balance rules (BBRs) (Table 4): - Total public spending ATT: negative and mostly significant; examples: - -0.320** (nearest-neighbor n=1) - -0.325*** (local linear) - Investment spending ATT: strongly negative and highly significant; examples: - -0.893*** (nearest-neighbor n=1) - -0.810*** (local linear) - Debt rules (DRs) (Table 4): - Coefficients statistically insignificant for both total and investment spending. - Expenditure rules (ERs) (Table 4): - Total public spending ATT: negative and significant in most specifications; examples: - -0.269 (nearest neighbor) - -0.294*** (local linear) - Investment spending ATT: positive and significant in many specifications; examples: - 0.510** (r=0.05) - 0.503** (local linear) - Interpretation: ERs associated with procyclical investment when investment is not shielded. - Investment-friendly rules (IRs) (Table 5): - Total public spending ATT: negative and significant; examples: - -0.401** (nearest-neighbor n=1) - -0.301*** (local linear) - Investment spending ATT: strongly negative and significant; examples: - -1.035** (nearest-neighbor n=1) - -1.193*** (r=0.03) - -1.170*** (kernel) - Rosenbaum Bounds Sensitivity Tests around: 1.2–1.3. - Excluding IRs from treatment group (Table 6): - Total public spending ATT: close to zero and insignificant. - Investment spending ATT: positive and significant; example: - 0.708** (nearest-neighbor n=1) - 0.645*** (kernel) - Interpretation: countercyclicality in aggregate FR results driven by IRs. - Joint treatments: - IR and ER jointly (Table 7): large negative ATT for total spending; example: - -1.080*** (nearest-neighbor n=1) - Investment spending ATT negative and significant (e.g., -1.070*** local linear). - IR and BBR jointly (Table 8): negative ATT for total spending (e.g., -0.365** n=3) and very large negative ATT for investment spending (e.g., -1.599*** nearest-neighbor n=1). - Cyclically-adjusted rules and escape clauses: - CARs (Table 9): negative and significant ATT for total spending; example: - -0.676*** (nearest-neighbor n=1) - Investment spending ATT generally insignificant (one specification -0.674**). - CRs (Table 10): ATT negative for total spending but generally insignificant; ATT for investment spending positive but insignificant. - CAR + ER (Table 11): ATT negative and significant for both total and investment spending in several specifications; examples: - Total spending: -0.813** (local linear) - Investment spending: -1.375*** (r=0.03) - CAR + BBR (Table 12): ATT negative and significant for total spending; investment spending ATT negative but weaker/marginal. ### Robustness and alternative estimations (Appendix 9; augmented probit and control-function OLS) - Augmented probit model: matching results using augmented probit (Table A9.2) similar in sign and magnitude to baseline. - Control-function OLS specification (Tables 13–14, selected coefficients): - Baseline OLS IR effect: - Total spending: IR ≡ -0.263 (Table 13, Column 1) — comparable to matching estimate -0.263. - Investment spending: IR ≡ -1.182 (Table 14, Column 1) — comparable to matching estimate -1.182. - Pscore coefficients (Table 13 / Table 14, Column 1): - Total spending Pscore ≡ 0.956*** (standard error 0.197). - Investment spending Pscore ≡ 1.960*** (standard error 0.466). - Sample sizes and fit: - Observations: 2,472 (total spending regressions), 2,225 (investment spending regressions). - Adjusted R-squared examples: 0.008 (Table 13, Column 1); 0.010 (Table 14, Column 1). ### Heterogeneity of treatment effects — macroeconomic interactions (selected interaction coefficients) - Lagged debt-to-GDP ratio: - IR*Lagged debt-to-GDP on total spending ≡ -0.830*** (standard error 0.206). - IR*Lagged debt-to-GDP on investment spending ≡ 0.414 (standard error 0.401) — not significant. - Level of development (Log real per capita GDP): - IR*Log real per capita GDP on total spending ≡ 0.051 (standard error 0.069) — not significant. - IR*Log real per capita GDP on investment spending ≡ -0.463*** (standard error 0.174). - Volatility of terms of trade: - IR*Volatility of terms of trade on total spending ≡ 0.026** (standard error 0.013). - IR*Volatility of terms of trade on investment spending ≡ -0.014 (standard error 0.035) — not significant. - Position in business cycle (Bad times dummy: output gap negative): - IR*Bad times dummy on total spending ≡ -0.381** (standard error 0.151). - IR*Bad times dummy on investment spending ≡ -0.381** (standard error 0.151). - Natural resource rents: - IR*Log of natural rents on total spending ≡ -0.010 (standard error 0.083) — not significant. - IR*Log of natural rents on investment spending ≡ 0.374* (standard error 0.199). ### Heterogeneity of treatment effects — political and rule-design interactions (selected interaction coefficients) - Government stability: - IR*Government stability on total spending ≡ 1.913** (standard error 0.794). - IR*Government stability on investment spending ≡ 0.904 (standard error 2.003) — not significant. - Monitoring, enforcement, coverage, legal basis: - IR*Monitoring on total spending ≡ -0.279** (standard error 0.114). - IR*Monitoring on investment spending ≡ -0.373 (standard error 0.403). - IR*Enforcement on total spending ≡ -0.512*** (standard error 0.144). - IR*Enforcement on investment spending ≡ -0.234 (standard error 0.404). - IR*Coverage on total spending ≡ -0.164** (standard error 0.0814). - IR*Coverage on investment spending ≡ -1.163** (standard error 0.569). - IR*Legal basis on total spending ≡ -0.295** (standard error 0.127). - IR*Legal basis on investment spending ≡ -1.062*** (standard error 0.404). - Year of major change: - IR*Year of major change on total spending ≡ -0.599*** (standard error 0.117). - IR*Year of major change on investment spending ≡ 0.448 (standard error 0.466) — not significant. - National vs supranational: - National IR on total spending ≡ -0.389*** (standard error 0.098). - National IR on investment spending ≡ -1.190*** (standard error 0.312). ### Synthesis of substantive findings - Design matters: not all fiscal rules have the same impact on cyclicality. - Standard rules: - Budget balance rules (BBRs): associated with countercyclical changes in overall spending and in investment spending. - Expenditure rules (ERs): associated with countercyclical changes in overall spending but procyclical changes in investment spending when investment is not shielded. - Debt rules (DRs): no discernible effect on cyclical stance of overall or investment spending. - Flexibility and exclusions: - Investment-friendly rules (IRs) or rules excluding public investment/priority outlays associated with larger countercyclical movements in both overall and investment spending. - Cyclically-adjusted features in ERs yield broadly similar results to IRs for ERs; cyclically-adjusted BBRs associated with countercyclical overall spending but procyclical investment spending. - Escape clauses (CRs) do not show a clear effect on cyclical stance. - Combined features (e.g., IR*ER, IR*BBR, CAR*ER) often yield stronger negative ATT estimates (greater countercyclicality), particularly for investment spending when IR overlaps with BBR. - Diagnostics: standardized bias p-values above 10% in majority of cases; Rosenbaum sensitivity bounds generally between 1.2 and 3. ### Policy implications and caveats - Policy implications: - Flexibility in the definition of the spending aggregate—particularly shielding public investment from the effect of the rule—is effective in enhancing countercyclicality. - Strong monitoring, enforcement, legal basis, broader coverage, and national bindingness strengthen the countercyclical impact of investment-friendly rules. - In commodity-exporting countries, building fiscal buffers in good times is important due to commodity cycle volatility. - Caveats and risks: - Countercyclicality does not guarantee fiscal soundness; the analysis does not assess whether countercyclical movements were symmetric or whether rules ensured saving in good times. - Investment-friendly rules may create incentives for creative accounting and opportunistic misclassification between current and capital spending. - Countercyclical public investment will deliver growth benefits only if accompanied by improved public investment management and sufficient fiscal space; in countries with serious debt sustainability concerns, growth effects may not relieve budgetary pressures. - Data limitations: procyclicality coefficients based on government spending do not account for changes in tax rates due to lack of comprehensive, homogenous tax-rate data for developing countries in the sample. *Source: IMF working paper content unit _wp1608 - 9.1 Robustness and Appendix 9 (extracted sections and selected tables).* ### References ............................................................................................................. ### _wp1608 - References ............................................................................................................. ### Tables - 1. Fiscal Rule Countries (number) ................................................................................................................................................................... 8 - 2. Probit Estimates of the Propensity Scores ........................................................................................................................................... 15 - 3. Matching Results: All Fiscal Rules ............................................................................................................................................................ 16 - 4. Matching Results: BBRs, DRs, and ERs ................................................................................................................................................... 17 - 5. Matching Results: Investment-friendly Rules (IRs) ........................................................................................................................... 18 - 6. Matching Results: Excluding IR Countries from the Treatment Group .................................................................................... 18 - 7. Matching Results: IRs and ERs Jointly as Treatment Group.......................................................................................................... 19 - 8. IRs and BBRs Jointly as Treatment Group ............................................................................................................................................ 19 - 9. Matching Results: Cyclically-adjusted Balance Rules (CARs)........................................................................................................ 20 - 10. Matching Results: Rules with Escape Clause (CRs) ........................................................................................................................ 21 - 11. Matching Results: CARs and ERs Jointly as Treatment Group .................................................................................................. 21 - 12. Matching Results: CARs and BBRs Jointly as Treatment Group ............................................................................................... 22 - 13. Heterogeneity of Treatment Effect of IRs on the Procyclicality of Total Public Spending ............................................ 25 - 14. Heterogeneity of Treatment Effect of IRs on the Procyclicality of Investment Spending ............................................. 26 ### Figures - 1. Fiscal Rules Adoption over Time (worldwide)*..................................................................................................................................... 6 - 2. Overlaps between Standard Rules (BBR and ER) and Flexible Rules (IR and SR)................................................................... 7 - 3. FRs and Procyclicality of Public Spending (1990–2012) ................................................................................................................. 10 - 4. Procyclicality of Public Spending in FR countries (1990–2012) ................................................................................................... 11 - 5. Public Spending Procyclicality in IR Countries (1990–2012) ........................................................................................................ 11 - 6. Public Spending Procyclicality in CAR Countries (1990–2012) .................................................................................................... 11 - 7. Public Spending Procyclicality in Escape Clause Rule Countries (1990–2012) ..................................................................... 12 ### Appendices - 1. Full Sample ........................................................................................................................................................................................................ 35 - 2. Types of Fiscal Rules (only for FR countries in our sample) .......................................................................................................... 36 - 3. Investment-friendly Rules Adoption Worldwide Through 2012 (Over a Minimum of One Year) ................................ 37 - 4. Sources and Definitions of Data ............................................................................................................................................................... 39 - 5. Descriptive Statistics ...................................................................................................................................................................................... 41 - 6. The Problem of Unobserved Heterogeneity ....................................................................................................................................... 42 - 7. Control Variables ............................................................................................................................................................................................ 43 - 8. Matching Results Using a More Restrictive ......................................................................................................................................... 45 *https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1608.pdf* ### 9.1 Robustness ......................................................................................................... ### 9.1 Robustness ### Introduction and Research Questions - Tension: calls for activist, countercyclical fiscal policy versus strengthening fiscal rules to ensure fiscal discipline. - Paper expands understanding of links between fiscal rules and the cyclicality of fiscal policy on three fronts: - Differentiate among types of fiscal rules and whether more flexible rules are associated with more or less cyclicality. - Compare cyclicality of overall spending versus investment spending. - Use propensity scores-matching techniques to address self-selection in the adoption of fiscal rules. ### Key empirical approach (overview) - Panel: unbalanced panel of 167 countries over 1990–2012; 82 countries had fiscal rules in place for at least one year between 1990 and 2012. - Main outcome: country-specific, time-varying cyclicality coefficients (β_it) estimated with Local Gaussian-Weighted Ordinary Least Squares (LGWOLS) using: - Equation (1): Δlog G_it = α_it + B_it Δlog Y_it + ε_it - Extended to Equation (2) with lagged dependent variable, 2SLS (Δlog Y instrumented by lags), and covariates X_it (including lagged debt-to-GDP ratio, government stability, volatility of terms of trade, trade openness, financial openness, inflation). - Interpretation: β_it < 0 indicates countercyclical spending; β_it > 0 indicates procyclical spending. - Propensity score matching (PSM) used to estimate average treatment effect on the treated (ATT) following standard PSM framework and diagnostics (standardized bias, p-values, Rosenbaum bounding sensitivity tests). - Seven matching algorithms employed: nearest-neighbor (n=1, n=3), radius matching (r = 0.01, 0.03, 0.05), local linear regression, and (Epanechnikov) kernel matching. Bootstrapped standard errors with 500 replications. ### Data, rule definitions, and stylized facts - Fiscal rule types and counts (over 1990–2012; Table 1): - Countries with fiscal rules: 80 (as of end 2012); 85 (over minimum one year over 1990–2012) — sample numbers reported: World Sample columns show 77 and 82 respectively. - Budget balance rules (BBRs): 64 (as of end 2012); 77 / 74 (world/sample over minimum one year). - Debt rules (DRs): 65 / 64. - Expenditure rules (ERs): 24 / 29. - Revenue rules (RRs): 7 / 7. - Investment-friendly rules (narrow definition): 19 / 23. - Investment-friendly rules (broad definition: IRs): 31 / 36. - Cyclically-adjusted balance rules (CARs): 14 / 15. - Rules containing well defined escape clauses (CRs): 45 / 45. - By 2012, 63 countries (close to 80 percent of those using fiscal rules) had some form of flexibility: 45 with escape clauses, 31 excluding investment or other priority spending, 14 with cyclically-adjusted or structural targets. - Stylized empirical patterns (1990–2012): - Figure 3 summary: total public spending on average was countercyclical in both FR and non-FR countries (negative coefficients), with stronger countercyclicality in FR countries; investment spending was procyclical in both groups but more procyclical in FR countries. - Figures 4–7 indicate adoption of fiscal rules is associated with strengthened countercyclicality of total spending and reduced procyclicality of investment spending, with investment-friendly rules showing more marked changes. CARs and CRs show mixed patterns. ### Propensity score estimation (Table 2 highlights) - Probit determinants (dependent variables: FR, BBR, DR, ER, IR, CAR, CR) — selected significant coefficients: - Log. Debt-to-GDP ratio (lagged): -0.096*** for FR (standard error 0.037); -0.494*** for IR column (0.075). - Growth instability: -0.132*** for FR (0.051). - Economic growth: 0.088* for FR (0.053). - Inflation rate: -0.469*** for FR (0.066). - Government stability: 0.538*** for FR (0.203). - Degree of democracy: 2.104*** for FR (0.124). - Presidential-type regime: -0.232*** for FR (0.075). - Majoritarian election rule: -0.269*** for FR (0.086). - Federal State: 0.407*** for FR (0.082). - Currency Union member: 1.206*** for FR (0.075). - Number of observations: 2,618 for probit estimations; Pseudo R2 for FR = 0.281. ### Matching results — main findings (Tables 3–12) - All fiscal rules (Table 3): - Procyclicality of Total Public Spending ATT estimates: negative and occasionally significant across matching methods (examples: -0.188** for r=0.03; -0.272*** local linear regression). - Procyclicality of Public Investment Spending ATT estimates: negative and larger in magnitude but significance varies (e.g., -0.508** for local linear regression; other methods less significant). - Rosenbaum Bounds Sensitivity Tests range reported: 1.7 to 3. - By standard rule type (Table 4): - BBRs: - Total public spending: ATT negative and mostly significant (example: -0.320** nearest-neighbor n=1; -0.325*** local linear). - Investment spending: ATT strongly negative and highly significant (example: -0.893*** nearest-neighbor n=1; -0.810*** local linear). - DRs: - Coefficients statistically insignificant for both total and investment spending. - ERs: - Total public spending: ATT negative and significant in most specifications (example: -0.269 local neighbor; -0.294*** local linear). - Investment spending: ATT positive and significant in many specifications (example: 0.510** r=0.05; 0.503** local linear), indicating ERs associated with procyclical investment when investment is not shielded. - Investment-friendly rules (IRs) (Table 5): - Total public spending: ATT negative and significant (example: -0.401** nearest-neighbor n=1; -0.301*** local linear). - Investment spending: ATT strongly negative and significant (example: -1.035** nearest-neighbor n=1; -1.193*** r=0.03; -1.170*** kernel). - Rosenbaum Bounds Sensitivity Tests around 1.2–1.3. - Excluding IRs from treatment group (Table 6): - Total public spending: ATT close to zero and insignificant. - Investment spending: ATT positive and significant (example: 0.708** nearest-neighbor n=1; 0.645*** kernel), suggesting the countercyclicality in the aggregate FR results was driven by IRs. - Joint treatments: - IR * ER (Table 7): large negative ATT for total spending (example: -1.080*** nearest-neighbor n=1) and negative ATT for investment spending (e.g., -1.070*** local linear), indicating combined IR and ER strengthens countercyclicality. - IR * BBR (Table 8): negative ATT for total spending (e.g., -0.365** n=3) and very large negative ATT for investment spending (e.g., -1.599*** nearest-neighbor n=1). - Other flexible rule features: - CARs (Table 9): negative and significant ATT for total spending (example: -0.676*** nearest-neighbor n=1), but ATT for investment spending generally insignificant (with one specification showing -0.674**). - CRs (rules with escape clauses) (Table 10): ATT negative for total spending but generally insignificant; ATT positive for investment spending but insignificant. - CAR + ER (Table 11): ATT negative and significant for both total and investment spending in several specifications (example total spending: -0.813** local linear; investment spending: -1.375*** r=0.03). - CAR + BBR (Table 12): ATT negative and significant for total spending (e.g., -0.676*** nearest-neighbor n=1); investment spending ATT negative but weaker and marginally significant in some specifications. ### Synthesis of substantive findings - Not all fiscal rules have the same impact; design matters. - Among standard rules: - Budget balance rules (BBRs): associated with countercyclical changes in overall spending and in investment spending. - Expenditure rules (ERs): associated with countercyclical changes in overall spending, but with procyclical changes in investment spending when investment is not excluded. - Debt rules (DRs): do not appear to affect the cyclical stance of either overall or investment spending. - Flexibility in design matters strongly: - Investment-friendly rules (IRs), or rules excluding public investment or other priority outlays from the rule perimeter: associated with larger countercyclical movements in both overall public spending and investment spending. - Cyclically-adjusted features in spending rules yield broadly similar results to IRs for ERs; cyclically-adjusted BBRs are associated with countercyclical movements in overall spending but with procyclical movements in investment spending. - Introduction of escape clauses (CRs) does not seem to affect the cyclical stance of fiscal policy in a clear way. - Combined features (e.g., IR*ER, IR*BBR, CAR*ER) often yield stronger negative ATT estimates (greater countercyclicality), particularly notable for investment spending when IR overlaps with BBR. - Diagnostic tests: standardized bias p-values above the critical threshold of 10% in the majority of cases; Rosenbaum sensitivity bounds generally between 1.2 and 3. ### Interpretation and cautions - Results suggest an expenditure rule, and to a lesser extent a budget balance rule, can cohabit with countercyclical fiscal policy when investment or other priority spending is excluded from the rule target. - Investment-friendly rules could help increase investment spending without necessarily undermining fiscal discipline and public debt sustainability, conditional on high investment efficiency — but: - Investment-friendly rules may create incentives for creative accounting and opportunistic misclassification between current and capital spending. - The paper stresses the operational challenge of amending rules to introduce flexibility without jeopardizing effectiveness. *Source: IMF working paper content unit _wp1608 - 9.1 Robustness (extracted sections 1–4 and matching results tables).* ### Appendix 9 shows the results obtained using a probit model augmented to account for possible ### _wp1608 - Appendix 9 shows the results obtained using a probit model augmented to account for possible ### Methodology and estimation approach - Propensity score matching methods applied to a panel of 167 advanced and developing economies over the period 1990–2012. - Augmented probit model used to estimate propensity scores; matching results using augmented probit (Table A9.2) are similar in sign and magnitude to non-augmented model (Table 5). - Control-function OLS specification (building on Lin and Ye (2009) and Tapsoba (2012)) estimated: - Cyclical stance 퐶푦푐푙.푖푡 (procyclicality of total spending or investment spending) regressed on IR푖푡 (investment-friendly rule dummy), estimated pscore푖푡 from baseline probit, vector X푖푡 of macroeconomic/political/institutional covariates, country fixed effects i_u, time fixed effects t_, and stochastic disturbance 휀푖푡. - Interaction term coefficient 휓 on IR × X푖푡 captures heterogeneity in the treatment effect of IRs. ### Key estimated coefficients and statistics (selected) - Baseline OLS IR effect on procyclicality: - Total spending: IR coefficient ≡ -0.263 (Table 13, Column 1), comparable to matching estimate -0.263. - Investment spending: IR coefficient ≡ -1.182 (Table 14, Column 1), comparable to matching estimate -1.182. - Selected Pscore coefficients (Table 13 / Table 14, Column 1): - Total spending Pscore ≡ 0.956*** (standard error 0.197). - Investment spending Pscore ≡ 1.960*** (standard error 0.466). - Sample sizes and fit (selected): - Observations: 2,472 (total spending regressions), 2,225 (investment spending regressions). - Adjusted R-squared (examples): 0.008 (Table 13, Column 1); 0.010 (Table 14, Column 1). - Significance notation: *, **, and *** denote significance at 10%, 5%, and 1% respectively. Bootstrapped standard errors use 500 replications. ### Heterogeneity of treatment effects — macroeconomic factors - Lagged debt-to-GDP ratio: - IR*Lagged debt-to-GDP ratio on total spending: interaction ≡ -0.830*** (standard error 0.206) — IRs more effective in curbing procyclicality when past debt-to-GDP ratio is high. - IR*Lagged debt-to-GDP ratio on investment spending: interaction ≡ 0.414 (standard error 0.401) — not significant. - Level of development (Log real per capita GDP): - IR*Log real per capita GDP on total spending: interaction ≡ 0.051 (standard error 0.069) — not significant. - IR*Log real per capita GDP on investment spending: interaction ≡ -0.463*** (standard error 0.174) — IRs have more impact on investment spending in more advanced economies. - Volatility of terms of trade: - IR*Volatility of terms of trade on total spending: interaction ≡ 0.026** (standard error 0.013) — high volatility limits procyclicality-reducing effect of IRs on overall spending. - IR*Volatility of terms of trade on investment spending: interaction ≡ -0.014 (standard error 0.035) — not significant. - Position in business cycle (Bad times dummy: output gap negative): - IR*Bad times dummy on total spending: interaction ≡ -0.381** (standard error 0.151) — countercyclical-enhancing effect stronger in bad times. - IR*Bad times dummy on investment spending: interaction ≡ -0.381** (standard error 0.151) — similarly significant. - Natural resource rents: - IR*Log of natural rents on total spending: interaction ≡ -0.010 (standard error 0.083) — not significant. - IR*Log of natural rents on investment spending: interaction ≡ 0.374* (standard error 0.199) — positive interaction suggests voracity effect in resource-rich countries weakens IRs’ ability to rein in procyclicality of investment spending. ### Heterogeneity of treatment effects — political factors - Government stability: - IR*Government stability on total spending: interaction ≡ 1.913** (standard error 0.794) — government stability appears to mitigate the cycle-friendly property of IRs on public spending. - IR*Government stability on investment spending: interaction ≡ 0.904 (standard error 2.003) — not significant. - Democracy and Election cycle: - IR*Democracy and IR*Election coefficients on both total and investment spending are not statistically significant. ### Heterogeneity of treatment effects — rule design and implementation - Monitoring: IR*Monitoring on total spending ≡ -0.279** (standard error 0.114); IR*Monitoring on investment spending ≡ -0.373 (standard error 0.403) — formal monitoring magnifies countercyclical effect on overall spending, less so for investment. - Enforcement: IR*Enforcement on total spending ≡ -0.512*** (standard error 0.144); IR*Enforcement on investment spending ≡ -0.234 (standard error 0.404). - Coverage: IR*Coverage on total spending ≡ -0.164** (standard error 0.0814); IR*Coverage on investment spending ≡ -1.163** (standard error 0.569). - Legal basis: IR*Legal basis on total spending ≡ -0.295** (standard error 0.127); IR*Legal basis on investment spending ≡ -1.062*** (standard error 0.404). - Year of major change (number of major changes): - IR*Year of major change on total spending ≡ -0.599*** (standard error 0.117) — frequent amendments associated with increased countercyclical impact. - IR*Year of major change on investment spending ≡ 0.448 (standard error 0.466) — not significant. - National vs supranational: - National IR on total spending ≡ -0.389*** (standard error 0.098). - National IR on investment spending ≡ -1.190*** (standard error 0.312). - National rules have stronger countercyclical effect than supranational ones. ### Main findings and conclusions - Overall results: - Fiscal rules (FRs) in general are associated with a weak reduction in the procyclicality of fiscal policy, but the design of the rule matters. - Among standard rules: - Budget balance rules associated with countercyclical changes in overall spending and in investment spending. - Expenditure rules associated with countercyclical changes in overall spending but procyclical changes in investment spending. - Debt rules have no effect on the cyclical behavior of public spending. - Flexibility in rule design has the strongest impact: - Investment-friendly rules (and rules that exclude some categories of spending from the rule target) are associated with enhanced countercyclicality of both overall spending and investment spending. - The countercyclical effect of investment-friendly rules is stronger in bad times and when enacted at the national level. - Inclusion of cyclical adjustment features in expenditure rules (ERs) yields broadly similar results. - Cyclically-adjusted budget balance rules (BBRs) associated with countercyclical movements in overall spending but procyclical changes in investment spending. - Escape clauses do not seem to affect the cyclical stance of fiscal policy. - Country heterogeneity and rule implementation matter: - Past debt-to-GDP ratio, level of development, volatility of terms of trade, natural resource endowment, and government stability influence the procyclicality-reducing role of investment-friendly rules. - Legal and enforcement arrangements, monitoring, coverage, and the national versus supranational nature of the rule significantly affect countercyclical outcomes. ### Policy implications and caveats - Policy implications: - Flexibility in the definition of the spending aggregate—particularly shielding public investment from the effect of the rule—is effective in enhancing countercyclicality of fiscal policy. - Strong monitoring, enforcement, legal basis, broader coverage, and national bindingness strengthen the countercyclical impact of investment-friendly rules. - In commodity-exporting countries, building fiscal buffers in good times is important because commodity cycles amplify the need for countercyclical capacity. - Caveats and risks: - Countercyclicality does not guarantee fiscal soundness; analysis does not assess whether countercyclical movements were symmetric or whether rules ensured saving in good times. - Investment-friendly rules may create incentives for creative accounting and misclassification between current and investment expenditure. - Countercyclical public investment will deliver growth benefits only if accompanied by improved public investment management and sufficient fiscal space; in countries with serious debt sustainability concerns, growth effects may not relieve budgetary pressures. - Data limitations: coefficients of procyclicality based on government spending do not account for changes in tax rates due to lack of comprehensive and homogenous tax-rate data, especially for developing countries in the sample. 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Full Sample - Antigua and Barbuda Chad Gabon Kenya Pakistan St. Lucia - Albania Comoros Iran, Islamic Rep. Moldova Solomon Islands Ukraine - Argentina Chile Germany Latvia Panama St. Vincent & the Grenadines - Algeria Congo, Dem. Rep. Iraq Mongolia South Africa United Arab Emirates - Armenia Colombia Greece Lithuania Peru Sweden - Angola Djibouti Jordan Morocco Sudan Uruguay - Australia Congo, Rep. Grenada Luxembourg Poland Switzerland - Azerbaijan Dominican Rep. Kazakhstan Nepal Suriname Uzbekistan - Austria Costa Rica Guinea-Bissau Malaysia Portugal Togo - Bahamas, The Egypt, Arab Rep. Kiribati Nicaragua Swaziland Vanuatu - Belgium Cote d'Ivoire Hong Kong Mali Romania United Kingdom - Bahrain El Salvador Korea, Rep. Oman Syrian Arab Rep. Venezuela, RB - Benin Croatia Hungary Malta Russia United States - Bangladesh Fiji Kuwait Papua New Guinea Tajikistan Vietnam - Botswana Cyprus Iceland Mauritius Senegal - Barbados Gambia, The Kyrgyz Rep. Paraguay Tanzania Yemen, Rep. - Brazil Czech Republic India Mexico Serbia - Belarus Georgia Lao PDR Philippines Thailand Zambia - Bulgaria Denmark Indonesia Namib ia Singapore - Belize Ghana Lebanon Qatar Tonga Zimbabwe - Burkina Faso Ecuador Ireland Netherlands Slovak Republic - Bhutan Guatemala Lesotho Samoa Trinidad and Tobago - Cabo Verde Equatorial Guinea Israel New Zealand Slovenia - Bolivia Guinea Macedonia, FYR Sao Tome and Prin. Tunisia - Cameroon Estonia Italy Niger Spain Bosnia and Herzegovina - Canada Finland Jamaica Nigeria Sri Lanka Cambodia Haiti Maldives Seychelles Turkmenistan - Central African Rep. France Japan Norway St. Kitts and Nevis China Honduras Mauritania Sierra Leone Uganda - Treatment Group Control Group ### Appendix 2. Types of Fiscal Rules (only for FR countries in our sample) Note: BBR= Budget Balance Rule; DR= Debt Rule; ER= Expenditure Rule; RR= Revenue Rule; BBR= Budget Balance Rule; DR= Debt Rule; ER= Expenditure Rule; RR= Revenue Rule; CAR= cyclically-adjusted balance rule (defined in terms of cyclically-adjusted balance); CR= Rule with well-defined escape clauses; IR= Investment-friendly rule; Sup = Supranational rule; Major Change= Year of last major change for ECs in brackets. Dominica, Kosovo and Liberia, adopted FRs, but are excluded from our sample because of data limitation on key variables for the study. Source: IMF Fiscal Affairs Department’s Fiscal Rule Database (2013). - Antigua and Barbuda 1998 1998 Yes - Argentina 2000 2000 Yes - Armenia 2008 - Australia 1985 (1998) 1998 1985 1985 Yes - Austria 1995 (1998) 1995 Yes Yes - Belgium 1992 1992 1993 (1998) 1995 (1999) Yes Yes - Benin 2000 2000 Yes Yes Yes - Botswana 2003 - Brazil 2000 2000 Yes Yes - Bulgaria 2006 2003 2006 (2010) Yes Yes Yes - Burkina Faso 2000 2000 Yes Yes Yes - Cameroon 2002 (2008) 2002 Yes Yes - Canada 1998 (2006) 1998 (2006) 1998 (2006) - Cabo Verde 1998 1998 - Central African Rep. 2002 (2008) 2002 Yes Yes - Chad 2003 (2008) 2002 Yes Yes - Chile 2001 (2010) Yes - Colombia 2011 2000 Yes - Congo. Rep. 2002 2002 Yes Yes - Costa Rica 2001 Yes - Côte d'Ivoire 2000 2000 Yes Yes Yes - Croatia 2012 2009 2012 Yes Yes Yes - Cyprus 2004 2004 Yes Yes - Czech Republic 2004 2004 Yes Yes - Denmark 1992 (2011) 1992 1994 (2009) 2001 (2012) Yes Yes Yes - Ecuador 2003 (2010) 2003 (2010) 2010 Yes - Equatorial Guinea 2002 (2008) 2002 Yes Yes - Estonia 1993 2004 Yes Yes - Finland 1995 (2011) 1995 (2011) 2003 (2011) Yes Yes Yes - France 1992 1992 1998 (2011) 2006 (2011) Yes Yes - Gabon 2002 (2008) 2002 Yes Yes - Germany 1969 (2009) 1992 1982 (2008) Yes Yes Yes - Greece 1992 1992 Yes Yes - Grenada 1998 (2006) 1998 Yes - Guinea-Bissau 2000 2000 Yes Yes Yes - Hong Kong 1997 Yes - Hungary 2004 (2012) 2004 (2012) 2010 Yes Yes - Iceland 2004 - India 2004 Yes - Indonesia 1967 (2004) 2004 - Ireland 1992 1992 - Israel 1992 (2010) 2005 (2010) Yes - Italy 1992 1992 Yes Yes - Jamaica 2010 2010 Yes - Japan 1947 (1998) 2006 (2010) Yes - Kenya 1997 1997 - Latvia 2004 2004 Yes Yes - Lithuania 2004 1997 (2004) 2008 2008 Yes Yes - Luxembourg 1990 (2004) 1990 Yes Yes Yes - Malaysia 1959 1959 (2009) Yes - Mali 2000 2000 Yes Yes Yes - Malta 2004 2004 Yes Yes - Mauritius 2008 Yes - Mexico 2006 (2009) Yes Yes - Namibia 2001 2010 - Netherlands 1992 1992 1994 1994 Yes Yes Yes - New Zealand 1994 1994 Yes - Niger 2000 2000 Yes Yes Yes - Nigeria 2007 - Norway 2001 Yes - Pakistan 2005 2005 Yes Yes - Panama 2002 (2008) 2002 (2008) Yes - Peru 2000 (2003) 2000 (2003) Yes - Poland 2004 (2008) 1999 (2004) 2011 Yes Yes - Portugal 1992 1992 Yes Yes - Romania 2007 2007 2010 Yes Yes - Russia 2007 - Senegal 2000 2000 Yes Yes Yes - Serbia 2011 2011 Yes - Singapore 1965 1991 (2008) Yes - Slovak Republic 2004 2004 Yes Yes - Slovenia 2004 2000 (2005) Yes Yes - Spain 1992 (2006) 1992 2011 Yes Yes Yes - Sri Lanka 2003 2003 - St. Kitts and Nevis 1998 1998 Yes - St. Lucia 1998 1998 Yes - St. Vincent and the Grenadines 1998 1998 Yes - Sweden 1995 (2000) 1995 1997 Yes Yes - Switzerland 2003 Yes - Togo 2000 2000 Yes Yes Yes - United Kingdom 1992 (2010) 1992 (2010) Yes Yes Yes - United States 1986 1990 (2011) Yes - Israel 1992 (2010) 2005 (2010) Yes *Italic: Source — _wp1608 - REFERENCES (PDF).* ### Appendix 3. Investment-friendly Rules Adoption Worldwide Through 2012 (Over a Minimum of One Year) ### Appendix 3. Investment-friendly Rules Adoption Worldwide Through 2012 (Over a Minimum of One Year) ### Country-level adoption highlights - Countries with Max. number of rules = 5: - Bulgaria 5 2003- - Croatia 5 2012- - Denmark 5 1994- - Finland 5 1995- - Countries with Max. number of rules = 4: - Germany 4 1985-2009 - Luxembourg 4 1990-2004 - Netherlands 4 2007-2010 1994-2006 - Spain 4 2006- - United Kingdom 4 1997- - Countries with Max. number of rules = 2 (selected examples with national rule years shown where available): - Argentina 2 2000-2008 - Brazil 2 2000- - Burkina Faso 2 2000- - Cameroon 2 2002- - Costa Rica 1 2001- - Ecuador 2 2003- - Gabon 2 2002- - Malaysia 2 1959- - Mali 2 2000- - Mexico 1 2009- - New Zealand 2 1994- - Pakistan 2 2005- - Senegal 2 2000- - Togo 2 2000- - Single-rule (Max. number of rules = 1) examples: - Hong Kong SAR, China 1 2002- - India 1 2004-2008 - Japan 1 1947- - Kosovo* 1 2008-2009 - Liberia* 1 2009- - Additional national/supranational notation from table: - Several countries show entries in columns "All rules are concerned" or "Some rules are concerned" under National Rules and Supranational Rules; specific per-country year ranges are listed in the source table. ### Aggregate counts - Total in table: 19 (All rules are concerned at national level) 6 (Some rules are concerned at national level) 6 (All rules are concerned at supranational level) 8 (Some rules are concerned at supranational level) - Note: *Countries that are not in the sample, owing to data limitation. ### Data provenance - Source dataset cited in table: IMF Fiscal Rule Dataset (2013) *Source: IMF Fiscal Rule Dataset (2013).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1608.pdf_