Individual Treatment Effects of Budget Balance Rules

By Francesca Caselli, Daniel Stoehlker, Philippe Wingender

December 11, 2020

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Francesca Caselli, Daniel Stoehlker, and Philippe Wingender. Individual Treatment Effects of Budget Balance Rules, (USA: International Monetary Fund, 2020) accessed November 8, 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 investigates the heterogenous effects of budget balance rules on fiscal policy in a large sample of countries. To derive country-specific treatment effects of fiscal rules and conduct inference, we use a Synthetic Difference-in-Differences Method. Our results indicate that countries with a budget balance rule improve their fiscal balance on average by around 3 percent after its introduction. However, our results also illustrate the importance of going beyond the average treatment effect, as it masks significant heterogeneity in the country-specific impact of the rule. We find that countries that would have had large deficits in the absence of the fiscal rule exhibit positive treatment effects, thus reducing their budget deficits. On the other hand, countries with budget surpluses respond to fiscal rules by reducing their budget surplus and moving closer to the numerical target of the rule. Our results also suggest that rules’ design matters: a small overall number of fiscal rules, and the presence of a monitoring process outside the government, especially at the supra-national level, improve significantly the effectiveness of the rules.

Subject: Budget planning and preparation, Fiscal rules, Fiscal stance, Government debt management, Public debt

Keywords: Balance rule, Budget balance rule, Difference-in-differences, Distribution of treatment effect, Donor country, Effects from the baseline SDD specification, Effects from the SDD specification, Fiscal policy, Heterogeneous treatment effects, Synthetic control, Treatment effect, Treatment effects from the SDD analysis, Treatment fit, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/274
Stock No:

WPIEA2020274
ISBN:

9781513563855
ISSN:

1018-5941

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