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Fiscal rules, inflation and monetary policy: International evidence

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  • Montes, Gabriel Caldas
  • Dantas, João

Abstract

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.

Suggested Citation

  • Montes, Gabriel Caldas & Dantas, João, 2025. "Fiscal rules, inflation and monetary policy: International evidence," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001123
    DOI: 10.1016/j.najef.2025.102472
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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