Debt affordability in developed and emerging market economies: the role of fiscal rules

Abstract

In this study, we examine the impact of fiscal rules on debt affordability across an extensive sample of developed and emerging market economies, employing a panel data model that accommodates weakly exogenous regressors and effectively addresses cross-section dependence. Our findings consistently reveal a positive and significant effect of fiscal rule implementation on public debt affordability, regardless of the various model specifications employed. Notably, the effect of fiscal rules is more pronounced in emerging market economies, where the implementation of any fiscal rule leads to improved debt affordability. In contrast, for developed countries, the benefits are realized primarily through the adoption of high-quality fiscal rules. These results provide robust evidence of the efficacy of fiscal rules in enhancing debt management and fiscal sustainability, particularly in emerging market economies. The findings underscore the importance of prudent fiscal policy in achieving favorable debt affordability levels, offering valuable insights for policymakers seeking to bolster fiscal resilience and optimize debt management strategies in both developed and emerging economies. © Academy of Economics and Finance 2024.