Do fiscal rules ensure fiscal discipline in developing countries?

Abstract

This paper studies the effect of National Numerical Fiscal Rules on  fiscal discipline in the context of developing countries during the period 1990-2015. It relied in the econometric methodology on the propensity score method, borrowed from the micro-economic literature for impact analysis, in order to correct the problem of endogeneity affecting the estimation of the effect of fiscal rules on budgetary discipline. The results of our work show that the average treatment effect (ATT) of fiscal rules on the Cyclically-Adjusted Primary Fiscal Balance (CAPB) is significantly positive and robust under a variety of alternative specifications. This means that, on average, countries with fiscal rules show a significant improvement in their fiscal disciplines compared to those without such rules (countries constituting the control group).

The policy implications of this research work suggest that the introduction of rules-based fiscal frameworks is a credible remedy to correct the problems of fiscal indiscipline and incredibility in the context of developing countries.