Do the level of government debt and economic development matter in the impact of fiscal rules on fiscal performance? Evidence from the dynamic panel threshold model

This study investigates the impact of debt, expenditure, and budget balance rules on fiscal performance in 31 advanced and 62 emerging economies from 2000 to 2020. Using a dynamic panel threshold model, it examines how the effectiveness of these rules changes with public debt levels, differences in the level of development, and rule design features. The results show that in emerging economies, expenditure rules are the most effective, whereas debt and budget balance rules have weaker or negative effects. Moreover, rigid rule design has no significant effect in emerging economies. In advanced economies, debt rules improve fiscal performance across all debt regimes, but their effectiveness declines when rigidly designed. Expenditure rules also perform well in advanced economies, especially under high debt and when designed with strong constraints. Budget balance rules generally have negative impacts, but this pattern differs across country groups and debt regimes. These findings show that rule type, flexibility, debt conditions, development stage are key to fiscal effectiveness and policymakers should consider these factors when designing and implementing fiscal rules.