From Rules to Freedom: How Fiscal Rules Influence Capital Flow Restrictions

Kwamivi Mawuli Gomado
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Kwamivi Mawuli Gomado: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: We examine the relationship between fiscal rules and capital controls across 100 countries spanning 1995 to 2019. Employing entropy balancing and alternative estimation techniques, our findings show that the adoption of fiscal rules is significantly associated with reduced reliance on capital control measures. The estimated association is notably stronger in developed countries. These results remain robust when addressing potential omitted variable bias, employing alternative estimation approaches, and accounting for structural factors. A heterogeneity analysis reveals that fiscal rules are associated with reduced controls on both capital inflows and outflows. From a dynamic perspective, fiscal rules are also associated with reduced capital controls across short, medium, and long-term horizons. Investigating the underlying mechanisms, the results indicate that fiscal rule adoption is associated with reduced capital control practices through three channels: enhancing sovereign credit ratings, containing inflation, and strengthening fiscal balances. Overall, these findings suggest that implementing stringent fiscal rules may facilitate the reduction of capital controls, thereby potentially fostering greater economic freedom and deepening international financial integration.

Date: 2026-05-07
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Published in Open Economies Review, 2026, ⟨10.1007/s11079-026-09869-1⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05615634

DOI: 10.1007/s11079-026-09869-1

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