Do fiscal rules reduce government borrowing costs in developing countries?

John Thornton, Chrysovalantis Vasilakis

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Abstract

We examine whether adopting a numerical fiscal rule framework to guide fiscal policy helped reduce the cost of borrowing by governments in a sample of 61 low- and middle-income countries for 1985–2017, 24 of which adopted such rules. We address the self-selection problem of policy adoption by applying a variety of propensity score matching methods and show that the average treatment effect of fiscal rules on government borrowing costs is quantitatively quite large and statistically significant in rule adopting countries. We also find that the presence of institutional arrangements to strengthen fiscal rules results in a larger reduction in borrowing costs than is the case without these arrangements, which is consistent with strong rules adding to the credibility of the fiscal policy framework.

Original languageEnglish
Pages (from-to)499-510
Number of pages12
JournalInternational Journal of Finance & Economics
Volume25
Issue number4
Early online date15 Dec 2019
DOIs
Publication statusPublished - Oct 2020

Keywords

  • Fiscal rules
  • government borrowing costs
  • propensity score matching
  • fiscal rules
  • developing countries
  • credibility

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