Analyzing the relationship between fiscal rule, fiscal transparency and fiscal performance: The developing countries practice

Political economy theorists attribute the fiscal instability that emerged in the 1980s to the deficit bias of political actors and the common pool problem. Fiscal imbalances threaten the stability of national economies and negatively affect fiscal performance. One of the solutions put forward to reduce fiscal instability is fiscal governance, including fiscal rules. This study analyzes the impact of fiscal rules and fiscal transparency on fiscal performance. Fiscal rules underwent a significant transformation after the global financial crisis. These rules with improved design features are called second generation fiscal rules. This study aims to investigate the impact of second generation fiscal rules on fiscal performance in developing countries. Second, there is a substantial literature suggesting that an increase in fiscal transparency will both directly have a positive impact on fiscal output and indirectly increase the effectiveness of fiscal policy measures such as fiscal rules. However, there is a limited literature on the effectiveness of fiscal transparency on fiscal performance in developing countries. Therefore, this study aims to investigate the impact of fiscal transparency on fiscal performance. The study analyzes the post-global financial crisis period 2008-2021 for 67 developing countries using random effects estimators. The findings show that poorly designed fiscal rules negatively affect fiscal performance. Therefore, it is possible to say that fiscal rules are not always a fiscal policy implementation that positively affects fiscal performance. Second, well-designed fiscal rules have a positive effect on fiscal performance as the degree of fiscal transparency increases (after a certain threshold), while poorly designed fiscal rules have a negative effect on fiscal performance as the degree of fiscal transparency increases (after a certain threshold). It can be said that fiscal transparency is an important factor that strengthens the effects of fiscal rules on fiscal performance, but the effect of fiscal rules on fiscal performance starts when the level of fiscal transparency exceeds a threshold value. As a result, fiscal rules may not be an effective factor in addressing fiscal instability without taking into account their design features. Moreover, it can be argued that the effectiveness of fiscal rules will increase when there is sufficient fiscal transparency and that fiscal governance factors are more effective in improving fiscal performance as a whole rather than separately.