Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy
IMF Working Papers, March 5, 2019
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Bibliographic details
- Authors: Francesca Caselli, Julien Reynaud
- Published: March 5, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498300865.001
Overview
- Paper estimates the causal effect of fiscal rules on fiscal balances in a panel of 142 countries over the period 1985-2015.
- Instrumental variable strategy exploits the geographical diffusion of fiscal rules across countries, based on the intuition that reforms in neighboring countries may affect the adoption of domestic reforms through peer pressure and imitational effects.
- Main comparative findings:
- Fiscal rules correlate with lower deficits in standard correlations.
- The positive link between fiscal rules and lower deficits disappears when endogeneity is correctly addressed using the authors’ IV strategy.
- An index of fiscal rules’ design shows that well-designed rules have a statistically significant impact on fiscal balances.
- Authors: Francesca Caselli, Julien Reynaud.
- Date: March 5, 2019.
Methodology
- Data: Panel of 142 countries, 1985-2015.
- Identification strategy: Instrumental variable (IV) approach exploiting geographical diffusion of fiscal rules across countries (peer pressure and imitation).
- Outcome variable focus: Fiscal balances (deficits).
- Treatment measures:
- Rule dummy (presence of fiscal rules).
- Strength/index of fiscal rules’ design.
- Estimation concerns explicitly addressed:
- Endogeneity of rule adoption.
- Weak instrument problems.
Key Findings and Quantitative Statements
- Sample and period:
- 142 countries.
- 1985-2015.
- Correlational result:
- Fiscal rules correlate with lower deficits (in naive correlations).
- IV-corrected result:
- The positive correlation between fiscal rules and lower deficits disappears when endogeneity is addressed.
- Design-quality result:
- Well-designed fiscal rules (as measured by an index of fiscal rules’ design) have a statistically significant impact on fiscal balances.
- Robustness:
- Several robustness tests conducted.
- Results are reported as not affected by weak instrument problems.
Robustness and Validation
- Multiple robustness tests performed to verify IV strategy validity.
- Authors report that results are robust to concerns about weak instruments.
Subjects and Keywords
- Subject: Econometric analysis, Estimation techniques, Fiscal policy, Fiscal rules, Fiscal stance, Inflation targeting, Monetary policy
- Keywords: core European Union country, Estimation techniques, Fiscal balances, fiscal rule, Fiscal rules, Fiscal stance, Global, Inflation targeting, Instrument variable (IV) estimation, outcome variable, rule dummy, rule effectiveness, strength index, treatment effect technique, WP
Francesca Caselli, and Julien Reynaud. "Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy", IMF Working Papers 2019, 049 (2019), March 5, 2019, DOI: https://doi.org/10.5089/9781498300865.001.
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- Working Paper