Do institutional aspects shape the effectiveness of independent fiscal institutions?

The case of countries' compliance with EU fiscal rules

To assess the potential of independent fiscal institutions (IFIs) to support compliance with EU fiscal rules, this study examines which institutional aspects are associated with IFI effectiveness. Our dataset comprises 30 IFIs in 26 EU member countries, obtained from a survey of members of the Network of EU IFIs in spring 2022. 

We present a descriptive analysis of the survey results on IFI effectiveness. We then econometrically evaluate the impact of some IFI attributes on compliance with the fiscal rules of the Stability and Growth Pact (SGP) for the period 2000-2021. As a proxy for IFI effectiveness, we use an index built on data from the European Fiscal Board database on compliance with fiscal rules (Larch et al., 2023). Thus, we construct an overall (aggregated) compliance index, calculated as the sum of indices that are defined as dummy-type variables (qualitative indicator) to measure compliance with every one of the four rules of the SGP governing the deficit, debt, structural balance and expenditure. As an alternative proxy for IFI effectiveness, we use two measures from the same database: an expenditure-rule compliance dummy and an expenditure-rule compliance gap. 

As variables of interest, we first use a dummy variable that takes a value of e if country j has established an IFI at time t, and 0 otherwise. We then use indices that are proxy variables for some features of IFIs, based on minimum standards proposed by the Network of EU IFIs and other aspects. Finally, we propose an overall index of institutional aspects, computed as the sum of seven corresponding indices. We also construct two dummy variables based on fiscal rules: one variable takes a value of 1 if the fiscal rules index is lower than the median of the sample, and 0 otherwise; and another variable takes a value of 1 if the fiscal rules index is greater than or equal to the median of the sample, and 0 otherwise. These dummy variables are then interacted with the IFI proxies. This approach enables us to examine whether compliance with the SGP fiscal rules differs when there is a higher number of national or supranational rules in place, compared with the presence of fewer rules. 

For the main estimation method, we employ the fixed effects estimator with robust standard errors and for robustness checks the bias-corrected least-squares dummy variable estimator.