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Flexible Boundaries: Evaluating the Effect of Escape Clause Activation

Author

Listed:
  • Carolina Ulloa-Suárez
  • Oscar Valencia
  • Jorge Guerra

Abstract

This paper investigates the impact of escape clause (EC) activation within fiscal rule (FR) frameworks, focusing on macroeconomic and financial variables. Leveraging the Synthetic Control Method (SCM), we estimate the effects of EC activation on debtto-GDP ratios, the Emerging Markets Bond Index (EMBI), and Credit Default Swaps (CDS). Our analysis spans both emerging and advanced economies that activated ECs during major shocks, including the Global Financial Crisis and the COVID-19 pandemic. A key methodological contribution is the integration of machine learning-based clustering techniques to enhance donor pool selection, thereby strengthening the robustness of SCM estimates. The findings reveal that EC activation lowers debt levels, reduces sovereign risk premiums, and increases fiscal space, with effects on financial variables persisting for two to twelve months. These results underscore the dual role of ECs in enabling fiscal flexibility while safeguarding the fiscal discipline objectives embedded in FR frameworks.

Suggested Citation

  • Carolina Ulloa-Suárez & Oscar Valencia & Jorge Guerra, 2025. "Flexible Boundaries: Evaluating the Effect of Escape Clause Activation," Working Papers of BETA 2025-05, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2025-05
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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