TY - JOUR

T1 - Do fiscal rules reduce government borrowing costs in developing countries?

AU - Thornton, John

AU - Vasilakis, Chrysovalantis

PY - 2020/10/13

Y1 - 2020/10/13

N2 - We examine whether adopting numerical fiscal rules 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.

AB - We examine whether adopting numerical fiscal rules 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.

KW - credibility

KW - developing countries

KW - fiscal rules

KW - government borrowing costs

KW - Propensity score matching

U2 - 10.1002/ijfe.1771

DO - 10.1002/ijfe.1771

M3 - Article

VL - 25

SP - 499

EP - 510

JO - International Journal of Finance and Economics

JF - International Journal of Finance and Economics

SN - 1099-1158

IS - 4

ER -