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Documento de trabajo

Fiscal Rules and Fiscal Performance: World Evidence

  • person Raimundo Soto

    Klaus Schmidt-Hebbel

  • class Documento de Trabajo IE-PUC, N° 517, 2018

Abstract: This paper presents world evidence on the contribution of fiscal rules to fiscal performance. The paper identifies the links between fiscal institutions, rules, and performance measures, and reviews the relevant literature on the potential contribution of different fiscal rules to performance. The empirical models identify the potential contribution of three types of rules –expenditure, budget balance, and debt rules– to four indicators of fiscal performance, controlling for other determinants. The empirical analysis is conducted using an econometric approach designed to deal with potential endogeneity, dynamic responses, and unobserved heterogeneity and tested on a world sample for 134 countries, spanning 1985-2015. We found that budget-balance and debt rules are effective in reducing the procyclicality of government spending and enhancing the stabilizing effect of fiscal policy. The estimated effects are economically important. Procyclicality of budget balances, on the contrary, is not affected by any type of rule. All three types of rules raise government budget balances but they have no significant effects on government debt. We also found that the existence of fiscal councils does not impinge on the ability of fiscal rules to dampen procyclicality. Regarding fiscal sustainability, our results indicate that budget balance rules have a significant disciplining effect on the fiscal stance. The evidence for the debt rule is statistically weak. The empirical evidence also points to a strong effect of sovereign wealth funds in improving fiscal sustainability.

Keywords: fiscal rules, fiscal performance, world evidence
JEL Classification: E62, E61, E02.