Rules Met, Goals Missed: The Compliance–Sustainability Gap

Oscar Valencia, Alfredo Villca, Carolina Ulloa-Suárez and Gustavo Sánchez

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: Fiscal rules are intended to support sustainable public finances, yet whether compliance with these rules actually improves fiscal sustainability remains an open question. This paper provides the first cross-country causal assessment of the effects of fiscal rule compliance on governments’ fiscal behavior and borrowing conditions. We extend the fiscal reaction function to allow both the primary balance response and the growthadjusted interest rate to depend on compliance, and address endogeneity using external instruments based on exogenous peer behavior across spatial and rating networks combined with System GMM. The results show that compliance substantially strengthens the fiscal response to rising debt and lowers the interest–growth differential, indicating that financial markets react to credible implementation rather than to the existence of rules alone. These effects intensify under high-debt conditions, where compliant governments adjust more forcefully and experience larger improvements in borrowing terms. Our analysis shows that compliance meaningfully enhances both fiscal reaction and financing conditions, but its contribution to sustainability ultimately depends on credible enforcement. Policy efforts should therefore prioritize the capacity and incentives needed for governments to effectively comply with their rules, not merely adopt them.

Keywords: Instrument variable (IV) estimation; Fiscal rules; Compliance; Sustainability. (search for similar items in EconPapers)
JEL-codes: E62 H61 H68 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2025-50

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