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Fiscal Rules, Robust Correction Mechanisms, and Sovereign Spreads

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  • Julien Acalin
  • Leonardo Martinez
  • Francisco Roch

Abstract

Both policy advice and economic theory advocate for fiscal rules with a clear anchor that reflects fiscal risk and a robust correction mechanism that implements a more ambitious fiscal consolidation when fiscal risk is higher. However, among more than 120 countries with fiscal rules, only six are identified as implementing such robust correction mechanisms: Armenia, Costa Rica, Cyprus, Czech Republic, Poland, and Slovakia. Using synthetic control methods and dynamic panel regressions, this paper finds that the introduction of fiscal rules with robust correction mechanisms has been effective in these countries, triggering a persistent median spread reduction of about 25 percent, or 75 basis points, after one year.

Suggested Citation

  • Julien Acalin & Leonardo Martinez & Francisco Roch, 2025. "Fiscal Rules, Robust Correction Mechanisms, and Sovereign Spreads," Department of Economics Working Papers 2025_11, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2025_11
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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