Bunching at 3 Percent: The Maastricht Fiscal Criterion and Government Deficits

By Francesca Caselli, Philippe Wingender

August 3, 2018

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Francesca Caselli, and Philippe Wingender. Bunching at 3 Percent: The Maastricht Fiscal Criterion and Government Deficits, (USA: International Monetary Fund, 2018) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper estimates the effects of the Maastricht treaty’s fiscal criterion on EU countries’ general government deficits. We combine treatment effects methods with bunching estimation, and find that the 3 percent deficit rule acts as a “magnet”, increasing the number of observations around the threshold, while reducing the occurrence of both large government deficits and surpluses. After the rule is adopted, the distribution of government deficits among EU countries displays 20 percent excess mass around the deficit ceiling compared to a counterfactual distribution in which countries have the same observable characteristics but without the fiscal rule. Most of the bunching response comes from a reduction in the number of high deficit observations. We also find that the average treatment effect on fiscal deficits is positive and statistically significant. Finally, we derive country-specific impacts under a rank invariance assumption and find that all EU countries have seen their fiscal position improve on average as a result of the deficit rule.

Subject: Econometric analysis, Fiscal policy, Fiscal rules, Fiscal stance, Government debt management, Logit models, Public financial management (PFM)

Keywords: Balance distribution, Bunching estimate, Bunching estimation, Bunching estimation approach, Covariate balancing, Deficit bias, Deficit ceiling, Deficit rule, Deficit threshold, Eastern Europe, Fiscal policy, Fiscal rules, Fiscal stance, FR rule, General government balance, Global, Government balance, Government balance distribution, Government debt management, Government deficit, Kernel density estimate, Logit models, Maastricht fiscal criterion, Treatment effects, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/182
Stock No:

WPIEA2018182
ISBN:

9781484371732
ISSN:

1018-5941

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