Fiscal rules, inflation and monetary policy: International evidence

The relationship between fiscal rules and monetary policy, particularly their impact on interest rates, remains underexplored in international empirical literature. To address this gap, we examine whether adopting fiscal rules – and specific types of rules – enhances monetary policy flexibility, enabling lower interest rates. We also assess whether inflation serves as a transmission channel between fiscal rules and interest rates. Our study covers 82 countries (49 developing and 33 developed) from 1993 to 2019, analyzing the full sample and sub-samples based on economic development and inflation-targeting policies. We distinguish between national and supranational fiscal rules, as well as different rule types (debt, budget, expenditure, and revenue). The findings indicate that fiscal rules contribute to lower interest rates, with expenditure rules playing a crucial role across all samples. Budget rules also show significance. Additionally, inflation serves as a key transmission mechanism linking fiscal rules to interest rates.