FISCAL RULES AND GOVERNMENT BORROWING COSTS: INTERNATIONAL EVIDENCE

John Thornton and Chrysovalantis Vasilakis

Economic Inquiry, 2018, vol. 56, issue 1, 446-459

Abstract: We find that the adoption of numerical fiscal rules reduces government borrowing costs in a sample of 101 advanced and developing countries for 1985–2010. We apply a variety of propensity score matching methods to address the self‐selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets. The results are robust to changes in country sample and alternative estimation methodology, and are consistent with fiscal rules helping to build policy credibility by reducing the probability of default and the “risk premium” on government debt that compensates lenders for this possibility. (JEL E43, G12, H60)

Date: 2018
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