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Evaluating Fiscal Performance: A Fixed-Effect Panel Threshold Approach to National and Supranational Rules

Year 2024, Volume: 11 Issue: 1, 412 - 426, 31.03.2024

Oğuzhan Yelkesen Pelin Varol İyidoğan

https://doi.org/10.30798/makuiibf.1427426

Abstract

Fiscal rules are designed to prevent budget deficits arising from frequent and abrupt changes in countries' fiscal policies. These changes can be attributed to shifts in regional and global economic conditions, as well as short-term decisions made by governments. Recently, the COVID-19 pandemic has led to increased government spending and borrowing, rendering governments more vulnerable. In this context, the implementation of fiscal rules has gained renewed attention. However, to construct a more resilient infrastructure against future crises, it is not only the national fiscal rules that are critical, but also the presence of supranational fiscal rules that can ensure coordination and discipline among countries has become increasingly important. This study, therefore, seeks to analyze the impact of national and supranational fiscal rules on fiscal performance in 31 advanced economies over the period 2000-2020, utilizing the fixed-effect panel threshold model approach. The results indicate that national fiscal rule implementations become effective after a certain threshold level, whereas supranational fiscal rules are effective both below and above a specific debt threshold. This implies that while both types of fiscal rules are effective, supranational rules stand out in terms of their magnitude and their effectiveness even at lower levels of debt. These findings are expected to guide policymakers in evaluating fiscal rule policies and balancing local needs with the achievement of regional objectives.

Keywords

Fiscal Rules Fiscal Policy Panel Threshold

References

  • Afonso, A., & Guimarães, A. S. (2015). The relevance of fiscal rules for fiscal and sovereign yield developments. Applied Economics Letters, 22(11), 920-924.
  • Afonso, A., & Hauptmeier, S. (2009). Fiscal Behaviour in the European Union: Rules, Fiscal Decentralization and Government Indebtedness. ECB Working Paper No. 1054. Available at SSRN: https://ssrn.com/abstract=1399284
  • Afonso, A., & Jalles, J. T. (2019). Fiscal rules and government financing costs. Fiscal Studies, 40(1), 71-90.
  • Annett, A. (2006). Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe's Fiscal Framework. IMF Working Paper No. 06/116. Available at SSRN: https://ssrn.com/abstract=910681
  • Asatryan, Z., Castellón, C., & Stratmann, T. (2018). Balanced budget rules and fiscal outcomes: Evidence from historical constitutions. Journal of Public Economics, 167, 105-119.
  • Badinger, H., & Reuter, W. H. (2017). The case for fiscal rules. Economic Modelling, 60, 334-343.
  • Barbier-Gauchard, A., Baret, K., & Minea, A. (2021). National fiscal rules and fiscal discipline in the European Union. Applied Economics, 53(20), 2337-2359.
  • Bergman, U. M., Hutchison, M. M., & Jensen, S. E. H. (2016). Promoting sustainable public finances in the European Union: The role of fiscal rules and government efficiency. European Journal of Political Economy, 44, 1-19.
  • Buchanan, J. M., & Tullock, G. (1965). The calculus of consent: Logical foundations of constitutional democracy (Vol. 100). University of Michigan Press.
  • Coman, R. (2017). The EU’s struggle for rule of law pre-and post-accession’. The Routledge handbook of justice and home affairs research, 264-275.
  • Cordes, T., Kinda, M. T., Muthoora, M. P. S., & Weber, A. (2015). Expenditure rules: effective tools for sound fiscal policy?. International Monetary Fund.
  • Davoodi, H. R., Elger, P., Fotiou, A., Garcia-Macia, D., Han, X., Lagerborg, A., ... & Medas, P. (2022). Fiscal rules and fiscal councils. IMF Working Paper WP 22/11.
  • Debrun, X., Moulin, L., Turrini, A., Ayuso-i-Casals, J., & Kumar, M. S. (2008). Tied to the mast? National fiscal rules in the European Union. Economic Policy, 23(54), 298-362.
  • Drazen, A. (2002). Fiscal rules from a political economy perspective. In G. Kopits (Ed.), Rules-based fiscal policy in emerging markets: Background, analysis, and prospects (pp. 15-29). Palgrave MacMillan.
  • Eyraud, L., Debrun, M. X., Hodge, A., Lledo, V. D., & Pattillo, M. C. A. (2018). Second-generation fiscal rules: balancing simplicity, flexibility, and enforceability. International Monetary Fund.
  • Fall, F., Bloch, D., Fournier, J.-M., & Hoeller, P. (2015). Prudent Debt Targets and Fiscal Frameworks (OECD Economic Policy Paper No. 15). Available at SSRN: https://ssrn.com/abstract=2649081
  • Gootjes, B., de Haan, J., & Jong-A-Pin, R. (2021). Do fiscal rules constrain political budget cycles?. Public Choice, 188, 1-30.
  • Hallerberg, M., Strauch, R. R., & Von Hagen, J. (2009). Fiscal governance in Europe. Cambridge University Press.
  • Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345-368.
  • IMF (2022a). Fiscal Rules Database, https://www.imf.org/external/datamapper/fiscalrules/map/map.htm (10.01.2024)
  • IMF (2022b). Public Finances in Modern History, https://www.imf.org/external/datamapper/pb@FPP/USA/FRA/JPN/GBR/SWE/ESP/ITA/ZAF/IND (10.01.2024)
  • IMF (2022c). Public Finances in Modern History, https://www.imf.org/external/datamapper/exp@FPP/USA/FRA/JPN/GBR/SWE/ESP/ITA/ZAF/IND (10.01.2024)
  • IMF (2023). World Economic Outlook, https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/CHE (10.01.2024)
  • Kantorowicz, J. (2014). Are (Fiscal) Rules Made to Be Broken? The Law and Economics Analysis of the Numerical Fiscal Constraints. Available at SSRN: https://ssrn.com/abstract=2412534
  • Kopits, M. G., & Symansky, M. S. A. (1998). Fiscal policy rules. International Monetary Fund.
  • Kraemer, R., & Lehtimäki, J. (2023). Government debt: the impact of fiscal rules at the European and national level. Empirica, 50(3), 783-805.
  • Krogstrup, S., & Wyplosz, C. (2010). A common pool theory of supranational deficit ceilings. European Economic Review, 54(2), 269-278.
  • Kumar, M., Baldacci, E., Schaechter, A., Caceres, C., Kim, D., Debrun, X., & Zymek, R. (2009). Fiscal rules–anchoring expectations for sustainable public finances. IMF Staff Paper. Washington, DC: International Monetary Fund.
  • Mileusnic, M. (2021). Steps towards a European Fiscal Union: Has the revised Stability and Growth Pact delivered so far?. Journal of Contemporary European Research, 17(3), 409-430.
  • Nerlich, C., & Reuter, W. H. (2013). The Design of National Fiscal Frameworks and Their Budgetary Impact (ECB Working Paper No. 1588). Available at SSRN: https://ssrn.com/abstract=2322659
  • Ostadzad, A. H. (2022). Innovation and carbon emissions: Fixed-effects panel threshold model estimation for renewable energy. Renewable Energy, 198, 602-617.
  • Pench, L., Ciobanu, S., Zogala, M., & Manescu, C. B. (2019). Beyond fiscal rules: How domestic fiscal frameworks can contribute to sound fiscal policy. VoxEU CEPR. https://voxeu.org/article/how-domestic-fiscal-frameworks-can-contribute-sound-fiscal-policy
  • Tapsoba, R. (2012). Do National Numerical Fiscal Rules really shape fiscal behaviours in developing countries? A treatment effect evaluation. Economic Modelling, 29(4), 1356-1369.
  • Thornton, J., & Vasilakis, C. (2018). Fiscal rules and government borrowing costs: International evidence. Economic Inquiry, 56(1), 446-459.
  • Wang, Q. (2015). Fixed-effect panel threshold model using Stata. The Stata Journal, 15(1), 121-134.
  • World Bank (2022a). World Development Indicators, https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG (10.01.2024)
  • World Bank (2022b). World Development Indicators, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG (10.01.2024) World Bank (2022c). World Development Indicators, https://data.worldbank.org/indicator/SP.POP.GROW (10.01.2024) World Bank (2023). Worldwide Governance Indicators, https://www.worldbank.org/en/publication/worldwide-governance-indicators (10.01.2024)

Year 2024, Volume: 11 Issue: 1, 412 - 426, 31.03.2024

Oğuzhan Yelkesen Pelin Varol İyidoğan

https://doi.org/10.30798/makuiibf.1427426

Abstract

References

  • Afonso, A., & Guimarães, A. S. (2015). The relevance of fiscal rules for fiscal and sovereign yield developments. Applied Economics Letters, 22(11), 920-924.
  • Afonso, A., & Hauptmeier, S. (2009). Fiscal Behaviour in the European Union: Rules, Fiscal Decentralization and Government Indebtedness. ECB Working Paper No. 1054. Available at SSRN: https://ssrn.com/abstract=1399284
  • Afonso, A., & Jalles, J. T. (2019). Fiscal rules and government financing costs. Fiscal Studies, 40(1), 71-90.
  • Annett, A. (2006). Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe's Fiscal Framework. IMF Working Paper No. 06/116. Available at SSRN: https://ssrn.com/abstract=910681
  • Asatryan, Z., Castellón, C., & Stratmann, T. (2018). Balanced budget rules and fiscal outcomes: Evidence from historical constitutions. Journal of Public Economics, 167, 105-119.
  • Badinger, H., & Reuter, W. H. (2017). The case for fiscal rules. Economic Modelling, 60, 334-343.
  • Barbier-Gauchard, A., Baret, K., & Minea, A. (2021). National fiscal rules and fiscal discipline in the European Union. Applied Economics, 53(20), 2337-2359.
  • Bergman, U. M., Hutchison, M. M., & Jensen, S. E. H. (2016). Promoting sustainable public finances in the European Union: The role of fiscal rules and government efficiency. European Journal of Political Economy, 44, 1-19.
  • Buchanan, J. M., & Tullock, G. (1965). The calculus of consent: Logical foundations of constitutional democracy (Vol. 100). University of Michigan Press.
  • Coman, R. (2017). The EU’s struggle for rule of law pre-and post-accession’. The Routledge handbook of justice and home affairs research, 264-275.
  • Cordes, T., Kinda, M. T., Muthoora, M. P. S., & Weber, A. (2015). Expenditure rules: effective tools for sound fiscal policy?. International Monetary Fund.
  • Davoodi, H. R., Elger, P., Fotiou, A., Garcia-Macia, D., Han, X., Lagerborg, A., ... & Medas, P. (2022). Fiscal rules and fiscal councils. IMF Working Paper WP 22/11.
  • Debrun, X., Moulin, L., Turrini, A., Ayuso-i-Casals, J., & Kumar, M. S. (2008). Tied to the mast? National fiscal rules in the European Union. Economic Policy, 23(54), 298-362.
  • Drazen, A. (2002). Fiscal rules from a political economy perspective. In G. Kopits (Ed.), Rules-based fiscal policy in emerging markets: Background, analysis, and prospects (pp. 15-29). Palgrave MacMillan.
  • Eyraud, L., Debrun, M. X., Hodge, A., Lledo, V. D., & Pattillo, M. C. A. (2018). Second-generation fiscal rules: balancing simplicity, flexibility, and enforceability. International Monetary Fund.
  • Fall, F., Bloch, D., Fournier, J.-M., & Hoeller, P. (2015). Prudent Debt Targets and Fiscal Frameworks (OECD Economic Policy Paper No. 15). Available at SSRN: https://ssrn.com/abstract=2649081
  • Gootjes, B., de Haan, J., & Jong-A-Pin, R. (2021). Do fiscal rules constrain political budget cycles?. Public Choice, 188, 1-30.
  • Hallerberg, M., Strauch, R. R., & Von Hagen, J. (2009). Fiscal governance in Europe. Cambridge University Press.
  • Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345-368.
  • IMF (2022a). Fiscal Rules Database, https://www.imf.org/external/datamapper/fiscalrules/map/map.htm (10.01.2024)
  • IMF (2022b). Public Finances in Modern History, https://www.imf.org/external/datamapper/pb@FPP/USA/FRA/JPN/GBR/SWE/ESP/ITA/ZAF/IND (10.01.2024)
  • IMF (2022c). Public Finances in Modern History, https://www.imf.org/external/datamapper/exp@FPP/USA/FRA/JPN/GBR/SWE/ESP/ITA/ZAF/IND (10.01.2024)
  • IMF (2023). World Economic Outlook, https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/CHE (10.01.2024)
  • Kantorowicz, J. (2014). Are (Fiscal) Rules Made to Be Broken? The Law and Economics Analysis of the Numerical Fiscal Constraints. Available at SSRN: https://ssrn.com/abstract=2412534
  • Kopits, M. G., & Symansky, M. S. A. (1998). Fiscal policy rules. International Monetary Fund.
  • Kraemer, R., & Lehtimäki, J. (2023). Government debt: the impact of fiscal rules at the European and national level. Empirica, 50(3), 783-805.
  • Krogstrup, S., & Wyplosz, C. (2010). A common pool theory of supranational deficit ceilings. European Economic Review, 54(2), 269-278.
  • Kumar, M., Baldacci, E., Schaechter, A., Caceres, C., Kim, D., Debrun, X., & Zymek, R. (2009). Fiscal rules–anchoring expectations for sustainable public finances. IMF Staff Paper. Washington, DC: International Monetary Fund.
  • Mileusnic, M. (2021). Steps towards a European Fiscal Union: Has the revised Stability and Growth Pact delivered so far?. Journal of Contemporary European Research, 17(3), 409-430.
  • Nerlich, C., & Reuter, W. H. (2013). The Design of National Fiscal Frameworks and Their Budgetary Impact (ECB Working Paper No. 1588). Available at SSRN: https://ssrn.com/abstract=2322659
  • Ostadzad, A. H. (2022). Innovation and carbon emissions: Fixed-effects panel threshold model estimation for renewable energy. Renewable Energy, 198, 602-617.
  • Pench, L., Ciobanu, S., Zogala, M., & Manescu, C. B. (2019). Beyond fiscal rules: How domestic fiscal frameworks can contribute to sound fiscal policy. VoxEU CEPR. https://voxeu.org/article/how-domestic-fiscal-frameworks-can-contribute-sound-fiscal-policy
  • Tapsoba, R. (2012). Do National Numerical Fiscal Rules really shape fiscal behaviours in developing countries? A treatment effect evaluation. Economic Modelling, 29(4), 1356-1369.
  • Thornton, J., & Vasilakis, C. (2018). Fiscal rules and government borrowing costs: International evidence. Economic Inquiry, 56(1), 446-459.
  • Wang, Q. (2015). Fixed-effect panel threshold model using Stata. The Stata Journal, 15(1), 121-134.
  • World Bank (2022a). World Development Indicators, https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG (10.01.2024)
  • World Bank (2022b). World Development Indicators, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG (10.01.2024) World Bank (2022c). World Development Indicators, https://data.worldbank.org/indicator/SP.POP.GROW (10.01.2024) World Bank (2023). Worldwide Governance Indicators, https://www.worldbank.org/en/publication/worldwide-governance-indicators (10.01.2024)
There are 37 citations in total.

Details

Primary Language English
Subjects Macroeconomic Theory
Journal Section Research Articles
Authors

Oğuzhan Yelkesen 0000-0002-3314-5068

Pelin Varol İyidoğan 0000-0002-4632-9130

Early Pub Date March 29, 2024
Publication Date March 31, 2024
Submission Date January 29, 2024
Acceptance Date March 15, 2024
Published in Issue Year 2024 Volume: 11 Issue: 1

Cite

APA Yelkesen, O., & Varol İyidoğan, P. (2024). Evaluating Fiscal Performance: A Fixed-Effect Panel Threshold Approach to National and Supranational Rules. Journal of Mehmet Akif Ersoy University Economics and Administrative Sciences Faculty, 11(1), 412-426. https://doi.org/10.30798/makuiibf.1427426
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