Why Do Countries Adopt Fiscal Rules?

In: The Manchester School, Band 85, Heft 1, S. 65-87

Abstract

This paper examines which economic, institutional and political characteristics of countries affect the likelihood that a numeral rule will be adopted as part of a fiscal strategy to limit the level of public debt. We estimate a panel binary response model over the period 1970–2012 for 110 countries, of which 58 opted to adopt such a rule. Our results suggest that the probability such a rule will be adopted is greater if a country has a high level of public debt, a relatively inflexible exchange rate regime, has already adopted inflation targeting, has deep credit markets and if other countries already have adopted a debt rule. There are some differences in decision factors between high‐income and lower income countries, with the level of economic development and the openness of the economy playing opposite roles in each country group, and the impact of monetary unions on debt rule adoption being much stronger in the former group. The results are robust to testing for reverse causality, including using different econometric techniques.