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Do fiscal rules reduce government borrowing costs in developing countries?

John Thornton and Chrysovalantis Vasilakis

International Journal of Finance & Economics, 2020, vol. 25, issue 4, 499-510

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.

Date: 2020
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Citations: View citations in EconPapers (6)

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https://doi.org/10.1002/ijfe.1771

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International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

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