Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Fiscal Rules in the World Panel Data 5

181 views

Published on

Raimundo Soto - Catholic University of Chile
Klaus Schmidt-Hebbel - Catholic University of Chile

ERF Training on Advanced Panel Data Techniques Applied to Economic Modelling

29 -31 October, 2018
Cairo, Egypt

Published in: Government & Nonprofit
  • Be the first to comment

  • Be the first to like this

Fiscal Rules in the World Panel Data 5

  1. 1. Datos de Panel 7 Raimundo Soto Instituto de Economía, PUC-Chile
  2. 2. Fiscal Rules in the World Klaus Schmidt-Hebbel Raimundo Soto Rethinking Fiscal Policy after the Crisis L’udovít Ódor (ed.) Cambridge University Press, 2017
  3. 3. Content • Fiscal Rules and Fiscal Frameworks • Contributions of this paper • Empirical analysis • Conclusions
  4. 4. Fiscal Rules and Fiscal Policy Frameworks
  5. 5. Fiscal Rules • Fiscal rules defined as: – Permanent constraints on fiscal policy based on simple, explicit, and quantitative targets or ceilings on budget aggregates (Kopits and Symansky, 1998; Debrun and Kumar, 2007; Schaechter et al. 2012) • Rules are defined and implemented at different government levels: – National, supranational, subnational
  6. 6. Four main categories of fiscal rules (i) Debt rules (ii) Budget balance rules – On different budget measures: overall, primary, recurrent (golden rule); actual, cyclically-adjusted or over the business cycle (iii)Expenditure rules – On different spending measures: total, primary, current (iv)Revenue rules
  7. 7. Spreading of Fiscal Rules • Fiscal rules started spreading in 1990s both industrial and developing/emerging countries – Only 4 countries had rules in place in 1982 – Increased to 48 countries in 2000 and 85 in 2013 • Most rules involve budget balance and public debt • National rules vs supranational rules
  8. 8. Countries with Fiscal Rules 1985-2014 Source: IMF Fiscal Rules Dataset, 2015
  9. 9. National and Supranational Fiscal Rules, 1985-2014 Source: IMF Fiscal Rules Dataset, 2015 National Rules Supranational Rules
  10. 10. Why do countries tie the hands of fiscal policymakers? • Democratically elected governments tend to have biases toward excessive debt and deficits • Fiscal discretion often leads to insolvency • Biases in fiscal policy lead to (Fatás 2005): (1) Fiscal policy volatility (2) Fiscal policy procyclicality (3) Unsustainable deficits and budget plans (4) Intergenerational unfairness
  11. 11. Modern fiscal framework • Shift in fiscal policy frameworks followed 1980’s revolution in monetary policy frameworks • Components of frontier fiscal framework: – Constitutional or fiscal-responsibility law – Procedural restrictions on budget adoption and execution – High standards in policy transparency and accountability – Planning horizon exceeding one year – Effective external control and auditing – Independent fiscal council – Sovereign wealth funds – Fiscal rules
  12. 12. General objectives of fiscal rules, restrictions, and institutions 1. Strengthen fiscal solvency and sustainability 2. Contribute to macroeconomic (cyclical) stabilization (i.e., lowering policy procyclicality or raising countercyclicality) 3. Strengthen resilience to government failures (i.e., reducing political-economy failures of fiscal policy) 4. Improve intergenerational equity
  13. 13. Benefits and costs of fiscal restrictions and rules • Benefits: – Achieving the four latter objectives • Costs: – Compliance with rules and restrictions can be macroeconomically costly under unforeseen shocks or when rules and restrictions are too narrowly defined – Lacking escape clauses, the latter can lead to suspension of rules, eroding policy credibility
  14. 14. Previous Literature and Contributions of this Paper
  15. 15. Literature on Fiscal Rules • Growing literature on effects of fiscal rules: – Fiscal performance – Economic growth – Welfare – etc. • Only three papers on determinants of adopting and maintaining fiscal rules: – Calderon and Schmidt-Hebbel (2008) – Appendix of IMF (2009) – Elbadawi, Schmidt-Hebbel, and Soto (2015)
  16. 16. Contribution We extend substantially previous literature by: (1) Specifying a framework encompassing six categories of potential determinants of fiscal rules: – Political and institutional variables, exchange-rate and monetary regimes, capital account openness and financial development, overall development, costs of having fiscal rules in place, and fiscal policy conditions (2) Conducting a broader empirical search based on: – More countries and longer horizons – Improved estimation techniques – Robustness checks
  17. 17. Empirical Analysis
  18. 18. Empirical Analysis • Rule definitions and scope – Only national rules – Any rule and by type (expenditure, revenue, budget balance, and debt) – Binary variable for rule (1=yes, 0=no) • Data for 115 countries, 1985-2014 – 46 adopted a fiscal rule during the period • High, medium and low income levels of all continents – 69 did not have a rule – Some countries abandoned rules (Argentina, Australia, Canada, Iceland, USA)
  19. 19. Empirical Analysis • Six categories of control variables – Institutional factors: democracy (+), checks and balances (?), federal countries (+), political stability (+) – Monetary systems: monetary union (+), fixed exchange (+), inflation targeting (+) – Financial development: cap. account openness (+), financial development (+)
  20. 20. Empirical Analysis • Six categories of control variables – Overall development: per-capita real GDP at PPP prices (+) – Alternative cost of fiscal rules: second moment of government revenue (-), second moment of government balance (-) – Fiscal conditions: fiscal deficit (-), dependency ratio (-), procyclicality of gov. expenditure (-)
  21. 21. Empirical Analysis • Econometric techniques for panel data models with binary dependent variable – Fixed effects (conditional logit) – Random effects (probit) • Change in probability vs probability level • Low collinearity among control variables • Lagged controls to reduce endogeneity/feedback
  22. 22. Empirical Results (Part 1) • Testing any national rule – Random effects models: • Sample (over 2,800 observations, 115 countries) • Signs and significance of all parameters as expected, except two very imprecisely measured (monetary union, exchange system) – Conditional fixed-effects models • Sample (1,250 observations, 43 countries) • Very similar results but much more imprecise
  23. 23. Empirical Results (Part 2) • Test national rules by type • Main Results – Too few observations on “revenue rules” to trust results – Other models valid (according to tests and judgment) – Significant heterogeneity in terms of size of coefficients – Significant heterogeneity in terms of significance – “Any rule ” models may be misleading (aggregation bias)
  24. 24. Empirical Results (Part 3) • Extend econometric models to include “any supranational rule” as regressor • General results do not change but for supranational rule obtains: • Expenditure: positive/significant effect • Revenue: non-significant • Budget balance: positive/significant effect • Debt: non-significant • Any rule: negative/significant
  25. 25. Main conclusions • Fiscal reforms and fiscal rules are motivated by a myriad of objectives. Then, why some countries adopt fiscal rules while other do not? • We answer empirically the following set of questions: – Which institutional arrangements favor adopting rules? – Are rules more likely associated to particular monetary and exchange regimes? – And to financial openness and economic development? – Are richer countries more likely to adopt fiscal rules? – Are better fiscal conditions conducive to adopt rules? – Does revenue and fiscal volatility inhibit adoption of rules?
  26. 26. Main conclusions • Institutional and political conditions contribute significantly to the probability of having a fiscal rule. • While exchange regimes do not contribute, inflation targeting is a significant determinant of the probability of having a rule. • Fiscal policy conditions also determine the likelihood of having fiscal rules in place. • Our measure of the alternative cost of having fiscal rules inhibits their adoption.
  27. 27. Cuadratura • El algoritmo de parametrización es de cuadratura y dependen de cuantos puntos de integración se usen. • Por defecto, xtprobit usa 12 • Tenemos que asegurar que los resultados no dependen de la selección de puntos de integración.
  28. 28. Main conclusions • Fiscal reforms and fiscal rules are motivated by a myriad of objectives. Then, why some countries adopt fiscal rules while other do not? • We answer empirically the following set of questions: – Which institutional arrangements favor adopting rules? – Are rules more likely associated to particular monetary and exchange regimes? – And to financial openness and economic development? – Are richer countries more likely to adopt fiscal rules? – Are better fiscal conditions conducive to adopt rules? – Does revenue and fiscal volatility inhibit adoption of rules?
  29. 29. Main conclusions • Institutional and political conditions contribute significantly to the probability of having a fiscal rule. • While exchange regimes do not contribute, inflation targeting is a significant determinant of the probability of having a rule. • Fiscal policy conditions also determine the likelihood of having fiscal rules in place. • Our measure of the alternative cost of having fiscal rules inhibits their adoption.

×