Flexible Boundaries: Evaluating the Effect of Escape Clause Activation

Carolina Ulloa-Suárez, Oscar Valencia () and Jorge Guerra

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: This paper investigates the impact of escape clause (EC) activation within fiscal rule (FR) frameworks, focusing on macroeconomic and financial variables. Leveraging the Synthetic Control Method (SCM), we estimate the effects of EC activation on debtto-GDP ratios, the Emerging Markets Bond Index (EMBI), and Credit Default Swaps (CDS). Our analysis spans both emerging and advanced economies that activated ECs during major shocks, including the Global Financial Crisis and the COVID-19 pandemic. A key methodological contribution is the integration of machine learning-based clustering techniques to enhance donor pool selection, thereby strengthening the robustness of SCM estimates. The findings reveal that EC activation lowers debt levels, reduces sovereign risk premiums, and increases fiscal space, with effects on financial variables persisting for two to twelve months. These results underscore the dual role of ECs in enabling fiscal flexibility while safeguarding the fiscal discipline objectives embedded in FR frameworks.

Keywords: Fiscal rules; Fiscal policy; Escape Clauses; Flexibility. (search for similar items in EconPapers)
JEL-codes: E62 H61 H68 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://beta.u-strasbg.fr/WP/2025/2025-05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2025-05

Access Statistics for this paper

More papers in Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg Contact information at EDIRC.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).