Fiscal rules, escape clauses, and credit markets: Evidence from financial crises

Boris Aguilera-Torres, Hipólito Talbot-Wright and Mauricio Villena

Economics Letters, 2025, vol. 256, issue C

Abstract: This paper investigates whether escape clauses in fiscal rules mitigate the negative effects of financial crises on domestic credit markets. Using a dynamic panel of 56 countries from 1985 to 2015, we estimate the impact of escape clauses on both domestic bank credit and sovereign bond spreads during crises. Our results show that escape clauses significantly soften the contraction in credit and reduce sovereign borrowing costs when crises occur. In contrast, discretionary fiscal deviations—those not supported by legal clauses—fail to produce similar benefits. These findings suggest that institutionalized fiscal flexibility plays a stabilizing role in periods of financial distress by supporting market confidence and access to finance. To our knowledge, this is among the first empirical studies to assess the role of escape clauses during idiosyncratic banking crises.

Keywords: Fiscal policy; Fiscal rules; Financial markets; Escape clauses (search for similar items in EconPapers)
JEL-codes: E62 G15 H30 O23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:256:y:2025:i:c:s0165176525004859

DOI: 10.1016/j.econlet.2025.112648

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