Do fiscal rules affect growth?

Bruno Delalibera (), Angélica Brum () and Luciene Pereiera ()
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Bruno Delalibera: Universitat de Barcelona
Angélica Brum: Sao Paulo School of Economics - FGV
Luciene Pereiera: Sao Paulo School of Economics - FGV

No 2025/487, UB School of Economics Working Papers from University of Barcelona School of Economics

Abstract: Over the past three decades, many countries have adopted fiscal rules. This paper studies their impact on economic growth using an overlapping generations model with endogenous growth, where the government imposes both a debt rule and a budget balance rule. The model shows that fiscal rules are not neutral: their design and interaction, through an endogenously adjusting tax rate, directly shape savings, capital accumulation, and longterm growth. The model identifies conditions under which a balanced growth path exists and highlights the possibility of multiple steady states. When fiscal rules are too loose or initial debt is too high, the economy may converge to an unstable path. Tightening fiscal rules improves long-run welfare but can reduce current utility due to higher taxes. Empirically, we estimate a growth equation and address endogeneity using an instrumental variable strategy based on the geographical diffusion of fiscal rules. The results indicate that the adoption of fiscal rules boosts growth in developing and lowincome countries. In Europe, only welldesigned rules are associated with higher growth. Across specifications, debt rules consistently outperform budget balance rules, especially in less developed economies.

Keywords: Fiscal Rules; Fiscal Policy; Economic growth; OLG Model; Instrumental Variables (search for similar items in EconPapers)
JEL-codes: E61 E62 O47 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ewp:wpaper:487web

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