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A nonlinear principal component analysis of the relationship between budget rules and fiscal performance in the European Union

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  • Francesco Lagona
  • Fabio Padovano

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. Copyright Springer Science+Business Media, LLC 2007

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  • Francesco Lagona & Fabio Padovano, 2007. "A nonlinear principal component analysis of the relationship between budget rules and fiscal performance in the European Union," Public Choice, Springer, vol. 130(3), pages 401-436, March.
    • Handle: RePEc:kap:pubcho:v:130:y:2007:i:3:p:401-436
    DOI: 10.1007/s11127-006-9095-z
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    2. Heinemann, Friedrich & Janeba, Eckhard & Schröder, Christoph & Streif, Frank, 2016. "Fiscal rules and compliance expectations – Evidence for the German debt brake," Journal of Public Economics, Elsevier, vol. 142(C), pages 11-23.
    3. Gebhard Kirchgassner, 2002. "The effects of fiscal institutions on public finance: a survey of the empirical evidence," Chapters, in: Stanley L. Winer & Hirofumi Shibata (ed.), Political Economy and Public Finance, chapter 9, Edward Elgar Publishing.
    4. Heinemann, Friedrich & Osterloh, Steffen & Kalb, Alexander, 2014. "Sovereign risk premia: The link between fiscal rules and stability culture," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 110-127.
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    6. António Afonso & João Tovar Jalles, 2019. "Fiscal Rules and Government Financing Costs," Fiscal Studies, John Wiley & Sons, vol. 40(1), pages 71-90, March.
    7. Ringa Raudla, 2010. "Governing budgetary commons: what can we learn from Elinor Ostrom?," European Journal of Law and Economics, Springer, vol. 30(3), pages 201-221, December.
    8. António Afonso & João Jalles, 2017. "Do Fiscal Rules Lower Government Financing Costs?," Working Papers REM 2017/15, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    9. Thushyanthan Baskaran, 2010. "On the link between fiscal decentralization and public debt in OECD countries," Public Choice, Springer, vol. 145(3), pages 351-378, December.
    10. Isakin, Maksim & Teplykh, Grigory, 2011. "Research of higher engineering education quality on the base of students Interviewing data by nonlinear principal components analysis (NLPCA)," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 21(1), pages 70-96.
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    12. Afonso, António & Huart, Florence & Tovar Jalles, João & Stanek, Piotr, 2022. "Twin deficits revisited: A role for fiscal institutions?," Journal of International Money and Finance, Elsevier, vol. 121(C).
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