The effects of fiscal rules on public finances and their identification

Many economic studies analyse the impact of fiscal rules and discuss their effectiveness in limiting excessive debt. A majority of these studies, however, neglects or only deals insufficiently with the potential issue of endogeneity. In this paper, we propose a novel identification approach which identifies the impact of fiscal rules free from effects driving simultaneously the fiscal performance and the existence or strength of rules at the country level. In its core, the approach relies on unexpected shocks in long-run growth in order to derive a setting free from unobserved fiscal preferences and to allow for causal interpretation.