Impact of Fiscal Rules on Government Expenditure and Tax Revenue in Emerging European Countries: Threshold Effect of Budget Deficit
Impact of Fiscal Rules on Government Expenditure and Tax Revenue in Emerging European Countries: Threshold Effect of Budget Deficit

Summary/Abstract: This study aims to investigate the effectiveness of fiscal rules in terms of government expenditure and tax revenues with and without the threshold effect of the budget deficit over the period 1995 – 2019 in 91 emerging European countries, as the frequency and severity of the implementation of fiscal rules vary according to the level of the budget deficit. To achieve this objective, the study firstly examines this relationship using the fixed and random effect methods without considering the threshold effect of budget deficit. Secondly, the study employs the panel threshold method proposed by Hansen (1999) to examine this relationship with the threshold effect of budget deficit, which is different from previous studies. Based on the panel threshold estimation, the results reveal that there are two threshold levels of budget deficit on government expenditure and a single threshold level of budget deficit on government tax revenue. Depending on these thresholds, the effect of fiscal rules on government expenditure and tax revenue varies significantly. This suggests that fiscal rules are more effective in ensuring fiscal discipline when the budget deficit is high and less effective when the budget deficit is low.

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