Badinger, Harald and Reuter, Wolf Heinrich
Measurement of Fiscal Rules: Introducing the Application of
Partially Ordered Set (POSET) Theory.
Journal of Macroeconomics, 43.
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)