Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to do with Them?

28 Pages Posted: 1 Feb 2011

See all articles by Carlos Caceres

Carlos Caceres

International Monetary Fund (IMF)

Ana Corbacho

International Monetary Fund (IMF) - Fiscal Affairs Department

Leandro Medina

George Washington University - Department of Economics; International Monetary Fund (IMF) - Western Hemisphere Department

Multiple version iconThere are 2 versions of this paper

Date Written: November 2010

Abstract

In recent years, many countries have adopted Fiscal Responsibility Laws to strengthen fiscal institutions and promote fiscal discipline in a credible, predictable and transparent manner. Still, results on the effectiveness of these laws remain tentative. In this paper, we test empirically whether fiscal performance, measured as the level of primary fiscal balances and their volatility, indeed improved after the implementation of Fiscal Responsibility Laws in a sample of Latin American and advanced economies. We show that traditional econometric approaches, which rely on the use of dummies in time series or panel regressions, yield biased estimates. In contrast, our empirical strategy recognizes that, a priori, the timing of the effect of these laws on fiscal performance is unknown, while controlling for the impact of the business and commodity cycles on fiscal outcomes. Overall, we find limited empirical evidence in support of the view that Fiscal Responsibility Laws have had a distinguishable effect on fiscal performance. However, Fiscal Responsibility Laws could still have other positive effects on the conduct of fiscal policy not analyzed here, for instance, through enhanced transparency and guidance in the budget process and lower risk premia.

Keywords: Business cycles, Commodity price fluctuations, Cross country analysis, Developed countries, Economic models, Fiscal analysis, Fiscal policy, Latin America, Legislation

Suggested Citation

Caceres, Carlos and Corbacho, Ana and Medina, Leandro, Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to do with Them? (November 2010). IMF Working Paper No. 10/248, Available at SSRN: https://ssrn.com/abstract=1750737

Carlos Caceres

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ana Corbacho (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Leandro Medina

George Washington University - Department of Economics ( email )

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

International Monetary Fund (IMF) - Western Hemisphere Department

700 19th Street NW
Washington, DC 20431
United States

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