What Type of Fiscal Rule Promotes the Fiscal Soundness?

Abstract

Empirical studies on the impact of fiscal institutions such as fiscal rule and the establishment of independent fiscal institutions on fiscal performance have often overlooked the endogeneity issues. This study utilizes the system GMM model in dynamic panel analysis to control for the endogeneity inherent in fiscal institutions. This study is distinctive from the previous researches in the following aspects: ① It indices the levels of fiscal rules and independent fiscal institutions, ② Furthermore, it includes an interaction term between the level of fiscal rule and the level of independent fiscal institutions, ③ It analyzes the type of fiscal rules that affects fiscal soundness effectively. The study finds the followings: First, the level of fiscal rules has a positive (+) impact on the fiscal balance. Second, among fiscal rule types, the level of expenditure rule has a positive (+) impact on the fiscal balance. Third, the interaction term between the level of expenditure rule and the level of independent fiscal institutions has a positive (+) impact on the fiscal balance. The implications of this study are as follows: Countries with strict fiscal rules tend to reduce fiscal deficits, and among various fiscal rule types, expenditure rule has a significant impact on fiscal soundness improvement. Moreover, it was confirmed that countries with well-established expenditure rule experience an increased impact on fiscal soundness when activating independent fiscal institutions. © 2024, Seoul National University - Graduate School of Public Administration. All rights reserved.