Determinants of fiscal rules

Abstract

This paper investigates the relationship between countries' fiscal balances and current accounts with an emphasis on the role of fiscal rules. The direct effect of fiscal policy on the current account via aggregate (import) demand is potentially amplified by indirect effects, materializing through interest rate effects and inter-generational transfers that reduce savings. On the other hand, the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through Ricardian equivalence considerations. We expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period . As previous studies we find a positive effect of fiscal balances on the current account, supporting the twin deficit hypothesis. However, the effect of fiscal balances on the current account depends on the stringency of fiscal (budget balance or debt) rules in place; it is reduced by one third on average and virtually eliminated for countries with the most stringent fiscal rules.

Accidental rivals? EU fiscal rules, NATO, and transatlantic burden-sharing

“…where EDUC it is the education instrument. The first stage results for this relationship, depicted in column 3, align with Badinger & Reuter's (2016) analysis that there is a causal relationship between education levels and fiscal rules. The p-value of 0.0004 for the F-statistic in column 3 also indicates that the instrument is quite strong.…”

“…A particular risk is selection bias – FRI ‘might actually be a mere reflection of a deep preference for fiscal discipline’ (Debrun et al, 2008: 319). I address these issues by using education level, an exogenous instrument for fiscal rules identified by Badinger & Reuter (2016), to conduct a 2SLS analysis of the effects of FRI.…”

“…The instrument meets three critical 2SLS requirements. First, it is a key causal determinant of fiscal rules (Badinger & Reuter, 2016). Second, it meets the independence assumption by being ‘unrelated to omitted variables we might like to control for’ (Angrist & Pischke, 2015: 106) – namely those identified above.…”

The Impact of Fiscal Rules on the Financial Management of Higher Self-Governing Units in the Slovak Republic

“…From the perspective of economic theory, the main reasons for implementing fi scal rules are as follows: political budget cycle, common-pool problem, information asymetry, impatience and short-sightedness of governments, spillovers and outside pressure (Badinger and Reuter 2017).…”

The Impact of Fiscal Rules on the Financial Management of Municipalities: A Comparative Analysis of the Czech Republic and Slovakia

“…From the perspective of economic theory (see, e.g. Badinger and Reuter (2017)), there are several reasons for implementing fiscal rules. For instance, in periods of economic growth, they are employed as measures to correct distorted incentives and generate pressure against overspending.…”