The Sovereign Spread Compressing Effect of Fiscal Rules during Global Crises
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Washington, DC: World Bank
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Do fiscal rules help suppress
sovereign spreads during periods of global financial stress
Yes! This paper examines whether fiscal rules contribute to
mitigating sovereign spreads in emerging markets and
developing economies during periods of heightened financial
and economic volatility worldwide. It finds that the
presence of fiscal rules is statistically significantly
associated with lower sovereign spreads during the COVID-19
crisis — about 350 basis points lower on average.
Interestingly, this correlation persists even when nations
deviate from these rules, indicating an expectation of
post-crisis compliance. The study shows that deviations from
fiscal rules are typically short-lived, with fiscal balance
rules reinstated within 3.5 years. Robustness checks,
including controls for institutional quality, fiscal rule
strength, and global and regional factors confirm these
results. Overall, the findings suggest that fiscal rules can
help emerging markets and developing economies signal fiscal
responsibility during episodes of global financial stress,
reducing borrowing costs relative to countries without
fiscal rules.
Palabras clave
FISCAL RULES, SOVEREIGN SPREADS, COVID-19 CRISIS