Do fiscal rules shape private-sector investment decisions?

Rayangnewendé Frans Sawadogo

Journal of Macroeconomics, 2024, vol. 81, issue C

Abstract: We investigate whether fiscal rules impact private domestic investment. Using data spanning 100 advanced and developing countries over the period 1990–2019 and applying the entropy balancing method, we reveal that implementing fiscal rules significantly improves private-sector investment. This finding is robust to a wide set of economic and econometric tests. Moreover, we perform a range of heterogeneity tests and find that the effect of fiscal rules only applies in developing countries and is amplified in good times and in countries with a strong fiscal stance. However, the benefits of fiscal rules are mitigated in resource-rich countries and during economic crises. Finally, we explore the underlying mechanisms and show that fiscal discipline, a composition effect fostering public investment, and macroeconomic stability are three driving forces that produce the stimulative effect of fiscal rules.

Keywords: Fiscal rules; Private domestic investment; Entropy balancing (search for similar items in EconPapers)
JEL-codes: B41 E22 E6 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:81:y:2024:i:c:s0164070424000326

DOI: 10.1016/j.jmacro.2024.103617

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