Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy

Author/Editor:

Francesca G Caselli ; Julien Reynaud

Publication Date:

March 5, 2019

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

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 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 fiscal rules correlate with lower deficits, but the positive link disappears when endogeneity is correctly addressed. However, when considering an 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 not affected by weak instrument problems.

Series:

Working Paper No. 19/49

English

Publication Date:

March 5, 2019

ISBN/ISSN:

9781498300865/1018-5941

Stock No:

WPIEA2019049

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

27

Please address any questions about this title to publications@imf.org