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Why Do Countries Have Fiscal Rules?

In: Economic Policies in Emerging-Market Economies Festschrift in Honor of Vittorio Corbo

Author

Listed:
  • Ibrahim Elbadawi

    (Dubai Economic Council)

  • Klaus Schmidt-Hebbel

    (Pontificia Universidad Católica de Chile)

  • Raimundo Soto

    (Pontificia Universidad Católica de Chile)

Abstract

Reforms of fiscal institutions and fiscal rules are motivated by several objectives: strengthening fiscal solvency and sustainability, contributing to macroeconomic stabilization, and making fiscal policy more resilient to government corruption and private-sector lobby. These objectives are shared by most fiscal policy makers worldwide. So why do some countries adopt fiscal rules while others do not? This question boils down to identifying the conditions under which some countries decide to adopt fiscal rules and maintain them over time. In particular, which political and institutional conditions are behind the decision of policy makers to tie their own hands? Are fiscal rules more likely to be associated to particular monetary and exchange-rate regimes, or to deeper financial market development and more openness? Is it more likely for countries to keep fiscal rules in place when they exhibit stronger fiscal policy performance –or does the opposite hold true? Are richer countries more likely to adopt fiscal rules? These are the empirical questions addressed by this paper. There are very few studies that identify institutional and economic variables explaining why countries adopt and maintain fiscal rules. This paper extends previous knowledge in two dimensions. First, the model used here is much broader in its specification, focusing on five categories of potential determinants for the choice of de jure fiscal rules, addressing the particular questions raised above. Second, the sample size is larger, comprising an annual-data panel sample of 94 countries (of which 35 have adopted fiscal rules) and spanning 34 years (1975-2008). The empirical estimation is performed using models selected after a detailed discussion of econometric issues relevant to this choice. The base-line results are subject to several robustness checks, presenting alternative results for different time samples, country samples, and categories of fiscal rules.
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Suggested Citation

  • Ibrahim Elbadawi & Klaus Schmidt-Hebbel & Raimundo Soto, 2015. "Why Do Countries Have Fiscal Rules?," Central Banking, Analysis, and Economic Policies Book Series, in: Ricardo J. Caballero & Klaus Schmidt-Hebbel (ed.),Economic Policies in Emerging-Market Economies Festschrift in Honor of Vittorio Corbo, edition 1, volume 21, chapter 9, pages 155-189, Central Bank of Chile.
    • Handle: RePEc:chb:bcchsb:v21c09pp155-189
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    Cited by:

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    2. Klaus Schmidt-Hebbel, 2012. "Fiscal Institutions in Resource-Rich Economies: Lessons from Chile and Norway," Documentos de Trabajo 416, Instituto de Economia. Pontificia Universidad Católica de Chile..
    3. Ablam Estel APETI & Bao-We-Wal BAMBE & Jean Louis COMBES, 2022. "On the Macroeconomic Effects of Fiscal Reforms : Fiscal Rules and Public Expenditure Efficiency," LEO Working Papers / DR LEO 2985, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    4. Mario Marcel, 2019. "Getting Rules into Policymakers’ Hands: A Review of Rules-based Macro Policy," Economic Policy Papers Central Bank of Chile 66, Central Bank of Chile.
    5. Enrique Alberola & Iván Kataryniuk & Ángel Melguizo & René Orozco, 2018. "Fiscal Policy and the Cycle in Latin America: the Role of Financing Conditions and Fiscal Rules," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 36(85), pages 101-116, April.
    6. Caselli, Francesca & Wingender, Philippe, 2021. "Heterogeneous effects of fiscal rules: The Maastricht fiscal criterion and the counterfactual distribution of government deficits✰," European Economic Review, Elsevier, vol. 136(C).
    7. Ablam Estel Apeti & Bao-We-Wal Bambe & Jean-Louis Combes & Eyah Denise Edoh, 2023. "Original Sin: Fiscal Rules and Government Debt in Foreign Currency in Developing Countries," Working Papers hal-04130477, HAL.
    8. Hoda Youssef & Ibrahim Elbadawi & Raimundo Soto, 2018. "Sovereign Wealth Funds and Macroeconomic Stabilization in the Home Economy," Working Papers 1175, Economic Research Forum, revised 29 Mar 2008.
    9. Dorian Balvir, 2024. "Fiscal rules: the imitation game," Applied Economics, Taylor & Francis Journals, vol. 56(6), pages 708-727, February.
    10. Tóth G., Csaba, 2017. "A nemzeti költségvetési szabályok elterjedése és hatása Európában [The spread of national fiscal rules and their effect in Europe]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 1119-1147.
    11. Bergman, U. Michael & Hutchison, Michael M. & Jensen, Svend E. Hougaard, 2016. "Promoting sustainable public finances in the European Union: The role of fiscal rules and government efficiency," European Journal of Political Economy, Elsevier, vol. 44(C), pages 1-19.

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    More about this item

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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