Abstract
Tests of the relationship between budget rules and fiscal performance are metric sensitive and arbitrary in the evaluation of the stringency of the rules, in the aggregation of these evaluations in an index and in the imposition of a linearly specified model. We propose a nonlinear principal component analysis to solve these problems and evaluate the relative disciplinary power of each rule. A battery of panel regressions on 1980–2003 optimally transformed data relative to 12 EU countries confirms that, upon controlling for standard economic, political and institutional variables, more stringent rules reduce fiscal imbalances and budget size.
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JEL Classification H61, H62, C49
Paper presented at the seminars of the CSEI, SIEP and EPCS2001. Partial funding by the Universitá Roma Tre through the Research Grant 2000 “Budget Procedures and Public Debt: A Multivariate Nonlinear Analysis” is gratefully acknowledged. We thank Jakob de Haan, Emma Galli, Bruno Bises and especially an anonymous referee for comments on previous versions of this paper. We also thank Francesca Rinesi for research assistantship. The usual caveat applies.
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Lagona, F., Padovano, F. A nonlinear principal component analysis of the relationship between budget rules and fiscal performance in the European Union. Public Choice 130, 401–436 (2007). https://doi.org/10.1007/s11127-006-9095-z
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DOI: https://doi.org/10.1007/s11127-006-9095-z