Fiscal Rules: Measurement, Determinants, Effects

The recent financial and economic crisis has highlighted the fiscal profligacy of many governments during the pre-crisis period, which has led to a revival of both the public and academic debate on whether fiscal policy makers should be constrained in their discretion. Fiscal rules are one important element of institutions that bind the budgetary process.

This project contributes to the current literature in three ways. First, it introduces partially ordered set theory (POSET) as an alternative approach to measure fiscal rules, which makes use of basic mathematical concepts to rank objects with different, otherwise incomparable ordinal properties, and does not rely on any subjective evaluation and weights. The application of POSET theory to rank objects based on multidimensional, ordinal properties is well established in the natural and technical sciences, but has - to the best of our knowledge - not yet been employed in the economics literature so far.

Second, the POSET approach is applied to construct measures of fiscal rules and the stringency of the budgetary process, based on data from the OECD International Budget Practices and Procedures Survey. Various measures referring to different stages of and features of the budgetary process are calculated and compared with composite indices of fiscal rules that have been used in previous studies. The resulting database should be of interest for many researchers in the field of fiscal policy.

Third, having calculated various measures of fiscal rules, alternative political-economy theories on the determinants of the fiscal rules will be tested. This is a question of interest in itself and, in addition, allows us to analyze empirical models, e.g. of the effect of fiscal rules on fiscal policy performance (volatility and cyclicality of fiscal policy, budget deficits, debt levels), their distribution effects and their interrelationship with current account balances and other macroeconomic variables.