Evaluating Fiscal Performance: A Fixed-Effect Panel Threshold Approach to National and Supranational Rules *

Abstract

Fiscal rules are designed to prevent budget deficits arising from frequent and abrupt changes in countries' fiscal policies. These changes can be attributed to shifts in regional and global economic conditions, as well as short-term decisions made by governments. Recently, the COVID-19 pandemic has led to increased government spending and borrowing, rendering governments more vulnerable. In this context, the implementation of fiscal rules has gained renewed attention. However, to construct a more resilient infrastructure against future crises, it is not only the national fiscal rules that are critical, but also the presence of supranational fiscal rules that can ensure coordination and discipline among countries has become increasingly important. This study, therefore, seeks to analyze the impact of national and supranational fiscal rules on fiscal performance in 31 advanced economies over the period 2000-2020, utilizing the fixed-effect panel threshold model approach. The results indicate that national fiscal rule implementations become effective after a certain threshold level, whereas supranational fiscal rules are effective both below and above a specific debt threshold. This implies that while both types of fiscal rules are effective, supranational rules stand out in terms of their magnitude and their effectiveness even at lower levels of debt. These findings are expected to guide policymakers in evaluating fiscal rule policies and balancing local needs with the achievement of regional objectives.