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On the Impact of Fiscal Policy on Inflation: The Case of Fiscal Rules

  • Jocelyne Marion Zoumenou ORCID logo EMAIL logo
Published/Copyright: March 6, 2025
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 25 Issue 1

Abstract

This paper examines the impact of fiscal rules on inflation across 79 countries from 1985 to 2021, employing entropy balancing as the methodology. Adopting this approach, the study addresses potential endogeneity concerns and considers variations among different country groups, including advanced economies, emerging markets, developing economies, and low-income countries. The primary outcome derived from the analysis indicates a negative relationship between fiscal rules and inflation in emerging and low-income countries. Moreover, this effect is observed for moderate and high inflation rates. These results are robust to different specifications.

Keywords: fiscal policy; inflation; propensity score methodology
JEL Classification: C31; E31; E61; E62
Corresponding author: Jocelyne Marion Zoumenou, EconomiX-CNRS, Paris Nanterre University, 200 Avenue de la République, 92001 Nanterre Cedex, France, E-mail: 

Appendix A: Descriptive Statistics

See Figures A.3, A.4 and Tables A.1–A.5

Figure A.3: Evolution of public debt over period. Source: Author based on the data comes from the IMF dataset.
Figure A.3:

Evolution of public debt over period. Source: Author based on the data comes from the IMF dataset.

Figure A.4: Number of countries adopting fiscal rules over time. Source: Author based on the data comes from the IMF dataset.
Figure A.4:

Number of countries adopting fiscal rules over time. Source: Author based on the data comes from the IMF dataset.

Table A.1:

Average of inflation following FR adoptions’.

Average of inflation
Without fiscal rules 38.70
With fiscal rules 3.65

  1. Note: The average inflation is very high because certain Emerging countries have had episodes of very high inflation.

Table A.2:

Proportion of fiscal rules adoption following income of countries.

Advanced countries Emerging countries Low-income countries
Fiscal rules all together
0 24.5 49.8 49.6
1 75.5 50.2 50.4
Expenditure rules
0 60.4 80.2 97.3
1 39.6 19.8 2.7
Revenue rules
0 93.4 98.9 74.8
1 6.6 1.1 25.2
Debt rules
0 49.9 70.5 51.5
1 50.1 29.5 48.5
Budget balance rules
0 27.9 58.7 50.7
1 72.1 41.3 49.3
Table A.3:

Proportion of fiscal rules adoption following exchange rate arrangement.

Pegged exchange rate regime Floating exchange rate regime
Fiscal rules all together
0 38.2 44.4
1 61.8 55.6
Expenditure rules
0 80.4 79.1
1 19.6 20.9
Revenue rules
0 86.2 99.5
1 13.8 0.5
Debt rules
0 45.1 82.4
1 54.9 17.6
Budget balance rules
0 41.9 49.9
1 58.1 50.1
Table A.4:

Statistics for IT countries.

Countries with IT
Average of inflation Average of public debt
Without fiscal rules 3.72 33.4
With fiscal rules 3.20 45.2
Table A.5:

Average of inflation and public debt following each FR type.

Average of inflation Average of public debt
Countries with ER
3.14 57.3
Countries with RR
3.49 47.0
Countries with DR
2.90 55.0
Countries with BBR
3.13 53.9

Appendix B: Entropy Balancing: Estimates

See Tables B.1–B.9

Table B.1:

ATT according to various rules for FRs countries.

ATT [1] [2]a [3]b
ER −0.20 −1.56 −0.84**
(0.28) (6.42) (0.34)
Treated/total 594/1,638 594/1,638 594/1,638
RR −0.63 −1.01 −1.27
(1.11) (0.96) (1.33)
Treated/total 280/1,638 280/1,638 280/1,638
DR −0.90** −2.27*** −1.21***
(0.37) (0.44) (0.44)
Treated/total 1,171/1,638 1,171/1,638 1,171/1,638
BBR −0.62** −2.49*** −0.78**
(0.27) (0.52) (0.35)
Treated/total 1,506/1,638 1,506/1,638 1,506/1,638
Covariates in the second step Yes Yes Yes
Year fixed effects in the second step Yes Yes Yes
Country fixed effects in the second step Yes Yes Yes

  1. Notes: ATT represents average treatment effects on the treated. a and bRespectively denote the inclusion of time-fixed effects in the first step, and the use of GDP deflator as the dependent variable. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and *** respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Table B.2:

ATT following exchange rate regimes and Inflation targeting.

ATT [1] [2]a [3]b
Fixed exchange rate regime & no IT
FR −1.34*** −1.13*** −1.50***
(0.41) (0.60) (0.58)
Treated/total 1,034/1708 1,034/1708 1,034/1708
No fixed exchange rate regime & no IT
FR 1.47* −0.90 −0.98
(0.78) (0.81) (0.90)
Treated/total 135/371 135/371 135/371
Covariates in the second step Yes Yes Yes
Year fixed effects in the second step Yes Yes Yes
Country fixed effects in the second step Yes Yes Yes

  1. Notes: ATT represents average treatment effects on the treated. a and bRespectively denote the inclusion of time-fixed effects in the first step, and the use of GDP deflator as the dependent variable. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and *** respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Table B.3:

ATT from 1985 to 2000.

Data from 1985 to 2000 (40 FR’s countries) [1] [2]a [3]b
FR 0.25 −0.11 −0.52
(0.57) (0.43) (0.61)
Treated/total 256/1,147 256/1,147 256/1,147
Covariates in the second step Yes Yes Yes
Year fixed effects in the second step Yes Yes Yes
Country fixed effects in the second step Yes Yes Yes

  1. Notes: ATT represents average treatment effects on the treated. a and bRespectively denote the inclusion of time-fixed effects in the first step, and the use of GDP deflator as the dependent variable. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and *** respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Table B.4:

ATT from 2000 to 2021.

Data from 2000 to 2021 [1] [2]a [3]b
FR −1.06*** −2.64*** −2.16***
(0.28) (0.67) (0.49)
Treated/total 294/1715 294/1715 294/1715
Covariates in the second step Yes Yes Yes
Year fixed effects in the second step Yes Yes Yes
Country fixed effects in the second step Yes Yes Yes

  1. Notes: ATT represents average treatment effects on the treated. a and b respectively denote the inclusion of time-fixed effects in the first step, and the use of GDP deflator as the dependent variable. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and ***Respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Table B.5:

ATT for all fiscal rules without the crise of subprimes.

Excluding the global financial crisis (2007–2008) [1] [2]a [3]b
FR −0.52** −2.31*** −0.86***
(0.25) (0.48) (0.33)
Treated/total 1,512/2,628 1,512/2,628 1,512/2,628
Covariates in the second step Yes Yes Yes
Year fixed effects in the second step Yes Yes Yes
Country fixed effects in the second step Yes Yes Yes

  1. Notes: ATT represents average treatment effects on the treated. a and bRespectively denote the inclusion of time-fixed effects in the first step, and the use of GDP deflator as the dependent variable. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and *** respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Table B.6:

ATT for all fiscal rules including hyperinflation periods.

Benchmark model with hyperinflation periods [1] [2]a [3]b
FR −0.39*** −0.31** −0.86***
(0.11) (0.15) (0.28)
Treated/total 1,638/2,787 1,638/2,787 1,638/2,787
Covariates in the second step Yes Yes Yes
Year fixed effects in the second step Yes Yes Yes
Country fixed effects in the second step Yes Yes Yes

  1. Notes: ATT represents average treatment effects on the treated. a and bRespectively denote the inclusion of time-fixed effects in the first step, and the use of GDP deflator as the dependent variable. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and *** respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Table B.7:

ATT for all fiscal rules removing Covid-19 crisis.

Removing the year 2021 (pandemic crisis) [1] [2]a [3]b
FR −0.55** −1.67*** −0.79**
(0.24) (0.36) (0.32)
Treated/total 1,563/2,707 1,563/2,707 1,563/2,707
Covariates in the second step Yes Yes Yes
Year fixed effects in the second step Yes Yes Yes
Country fixed effects in the second step Yes Yes Yes

  1. Notes: ATT represents average treatment effects on the treated. a and bRespectively denote the inclusion of time-fixed effects in the first step, and the use of GDP deflator as the dependent variable. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and *** respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Table B.8:

Placebo test with unemployment rate as outcome.

Unemployment as outcome [1] [2]a
All countries −0.17 −0.15
(0.13) (0.16)
Treated/total 1,638/2,787 1,638/2,787
Covariates in the second step Yes Yes
Year fixed effects in the second step Yes Yes
Country fixed effects in the second step Yes Yes

  1. Notes: ATT represents average treatment effects on the treated. aDenotes the inclusion of time-fixed effects in the first step. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and *** respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Table B.9:

ATT of FRSI.

EB for FRSI
All countries 0.04
(0.88)
Developed countries −0.07
(0.05)
Non developed countries 4.84
(3.95)
Covariates in the second step Yes
Year fixed effects in the second step Yes
Country fixed effects in the second step Yes

  1. Notes: ATT represents average treatment effects on the treated. Bootstrapped standard errors are shown in parentheses. The symbols, *, **, and *** respectively stand for p < 0.10, p < 0.05, and p < 0.01.

Appendix C: List of Variables

See Table C.1

Table C.1:

Variable, source and definition.

Variable Source Definition
Treatment
Fiscal rules’ adoption IMF fiscal rules dataset 1 = country has adopted FR, 0 otherwise
Fiscal rules strength index Authors’ calculations Formula based on Gootjes, de Haan, and Jong-A-Pin (2021).
Dependents
Inflation rates WB A cross-country database of inflation (version January 2023) Core consumer price inflation, annual
GDP deflator WB A cross-country database of inflation (version January 2023) GDP deflator growth rate, annual
Covariates
Real GDP per capita WB Sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products.
Debt-to-GDP ratio IMF global debt database & WB Gross debt and aims at covering all debt instruments owed by the general and/or central government, as defined in the IMF’s public debt.
Dependency ratio WB world development indicators Ratio of dependents (people younger than 15 or older than 64) to the working-age population–those ages 15–64.
Inflation targeting National central banks 1 = country with IT, 0 otherwise.
Political stability WB world governance indicators & WB Africa development indicators Perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence or terrorism.
Public deficit under 3 % dummy Authors’ calculations 1 = country comply with BBR, 0 otherwise.
Public debt under 60 % dummy Authors’ calculations 1 = country comply with DR, 0 otherwise.
Trade openness WB world development indicators Trade (imports plus exports) in % of GDP.
Political orientation of govt Database of political institutions (EXECRLC) 1 = right; 2 = center; 3 = left.
Unemployment rate International labor organization Number of persons who are unemployed as a percent of the labor force (i.e., the employed plus the unemployed).
Education WB world development indicators Percentage of population ages 25 and over that attained or completed lower secondary education.
Non-pegged ERR Ilzetzki, Reinhart, and Rogoff (2019) 1 = managed float, 0 otherwise.
Fiscal council Davoodi et al. (2022a, 2022b) 1 = country have fiscal council, 0 otherwise.
Level of institutional quality Freedom house Combination of the overall score awarded for political rights and the overall score awarded for civil liberties.

  1. Notes: IMF, international monetary fund; WB, World Bank.

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Supplementary Material

This article contains supplementary material (https://doi.org/10.1515/bejm-2024-0165).

Received: 2024-01-26
Accepted: 2025-02-07
Published Online: 2025-03-06

© 2025 Walter de Gruyter GmbH, Berlin/Boston

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https://doi.org/10.1515/bejm-2024-0165
Keywords for this article
fiscal policy; inflation; propensity score methodology

Articles in the same Issue

  1. Frontmatter
  2. Advances
  3. A Matter of Minutes: Unexpected FOMC Communication and Fed Credibility
  4. Do Firm-Level Shocks Generate Aggregate Fluctuations? A Cross-Country Analysis
  5. Financial Frictions at Entry, Average Firm Size, and Productivity
  6. Healthy Grands, Fertility and Pensions
  7. Contributions
  8. Robust Optimal Monetary Policies in Behavioral New Keynesian DSGE Models
  9. On the Impact of Fiscal Policy on Inflation: The Case of Fiscal Rules
  10. Gini in the Taylor Rule: Should the Fed Care About Inequality?
  11. Housing Booms and Busts: Dissecting Housing and MBS Markets Linkages
  12. Guardians of (In)Equality: Unmasking the Role of Military Spending in Shaping Income Inequality
  13. Natural Disasters and Capital Accumulation: The Role of Precautionary Saving and Capital Market Openness
  14. Short-Run Impacts of Floods: A Case Study from India
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