Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to Do with Them?
IMF Working Papers, November 1, 2010
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Bibliographic details
- Authors: Leandro Medina, Carlos Caceres, Ana Corbacho
- Published: November 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455209484.001
Summary
- Objective: Test empirically whether fiscal performance, measured as the level of primary fiscal balances and their volatility, improved after implementation of Fiscal Responsibility Laws (FRLs) in a sample of Latin American and advanced economies.
- Key claim: Traditional econometric approaches that rely on dummies in time series or panel regressions yield biased estimates; the paper proposes an alternative empirical strategy that allows the timing of FRL effects to be unknown while controlling for business and commodity cycles.
- Main overall finding: Limited empirical evidence that Fiscal Responsibility Laws have had a distinguishable effect on fiscal performance.
- Caveat: FRLs could still produce other positive effects on the conduct of fiscal policy not analyzed here (for instance, enhanced transparency and guidance in the budget process and lower risk premia).
Methodology
- Approach: Empirical strategy that does not impose a priori timing for the effect of FRLs on fiscal performance and controls for business and commodity cycles’ impacts on fiscal outcomes.
- Contrast: Traditional methods use FRL dummy variables in time series or panel regressions; authors argue these methods yield biased estimates.
Findings and Evidence
- Fiscal level and volatility:
- The study measures fiscal performance using: the level of primary fiscal balances and their volatility.
- Result: Limited empirical evidence supporting a distinguishable effect of FRLs on these measures.
- Limitations and alternatives:
- The analysis focuses on level and volatility of primary fiscal balances; other potential FRL effects (transparency, budget guidance, risk premia) are acknowledged but not analyzed.
Policy implications and recommendations
- Interpretation for policymakers:
- Do not assume that adoption of FRLs will automatically yield measurable improvements in the level or volatility of primary fiscal balances.
- Consider complementary reforms that enhance transparency and budget process guidance, which may yield benefits not captured by primary-balance level/volatility metrics.
- Be aware that FRLs might lower risk premia even if not visibly changing primary-balance metrics; monitor broader financial and institutional indicators in addition to fiscal-balance measures.