Title: INSTITUTIONAL FISCAL CONSTRAINTS AND PUBLIC DEBT: A DYNAMIC PANEL ANALYSIS OF EU COUNTRIES USING SYSTEM GMM
Author:
Dimitra Mitsi
Abstract:
This study empirically examines the relationship between fiscal rules and public debt sustainability within the European Union (EU) by employing a dynamic panel data approach based on the two-step System Generalized Method of Moments (System GMM) estimator. Utilizing an unbalanced panel of 27 EU member states from 1999 to 2021, the analysis investigates whether the legal strength, institutional comprehensiveness, and operational design of fiscal rules are associated with improved sovereign debt outcomes, measured by changes in the general government debt-to-GDP ratio.
To address key econometric concerns—including endogeneity, unobserved heterogeneity, and the high persistence of debt ratios—we implement a dynamic panel specification that instruments potentially endogenous variables using their appropriate lag structures. The fiscal rule index used in the analysis captures multi-dimensional aspects of rule design, including legal anchoring, monitoring mechanisms, and enforcement provisions. Additional control variables—primary fiscal balance, real GDP growth, inflation, and institutional quality—are included to isolate the marginal effect of fiscal rules on debt dynamics.
Estimation results indicate that fiscal rules exert a statistically significant and economically substantive negative effect on public debt levels. More stringent and comprehensive fiscal frameworks are associated with lower debt ratios, conditional on macroeconomic fundamentals and governance quality. These findings are robust across multiple sensitivity checks, including alternative model specifications, exclusion of crisis periods, and subgroup analyses based on institutional governance.
The results underscore the importance of institutional context in determining the effectiveness of fiscal rules. The mere presence of rules is insufficient; their impact depends critically on design features and enforcement credibility. These findings have significant policy implications for the ongoing refinement of EU fiscal architecture, advocating for rule-based frameworks that are both credible and adaptable to economic fluctuations.
Keywords: Fiscal Rules, Public Debt, EU Governance, System GMM
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