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Public Choice

, Volume 130, Issue 3–4, pp 401–436 | Cite as

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

  • Francesco Lagona
  • Fabio Padovano
Original Article

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.

Keywords

Budget rules Fiscal performance Nonlinear principal components 

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Copyright information

© Springer Science+Business Media, LLC 2006

Authors and Affiliations

  1. 1.Dipartimento di Istituzioni PubblicheEconomia e Società Università di Roma TreRomaItaly

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