Measurement of Fiscal Rules: Introducing the Application of Partially Ordered Set (POSET) Theory

Data on (economic) institutions are often available only as observations on ordinal, inherently incomparable properties, which are then typically aggregated to a composite index in the empirical social science literature. From a methodological perspective, the present paper advocates the application of partially ordered set (POSET) theory as an alternative approach. Its main virtue is that it takes the ordinal nature of the data seriously and dispenses with the unavoidably subjective assignment of weights to incomparable properties, maintains a high standard of objectivity, and can be applied in various fields of economics. As an application, the POSET approach is then used to calculate new indices on the stringency of fiscal rules for 81 countries over the period 1985 to 2012 based on recent data by the IMF (2012). The derived measures of fiscal rules are used to test their significance for public finances in a fiscal reaction function and compare the POSET with the composite index approach. (authors' abstract