Can fiscal rules improve financial markets access for developing countries ?

Several countries have introduced fiscal rules to deter fiscal profligacy, enhance the credibility of fiscal policy and reduce borrowing costs. In this paper, we examine the strength of fiscal rules in terms of improving financial markets access for developing countries. We use entropy balancing and various propensity score matching as well. We find that the adoption of fiscal rules reduces (increases) sovereign bond spreads (sovereign debt ratings) in a sample of 36 developing countries, which are part of the JP Morgan Emerging Markets Bond Index Global (EMBIG), over the period 1993-2014. We explain this finding by the credibility of fiscal policy channel: more credible governments are rewarded in the international financial markets with low sovereign bond spreads and high sovereign debt ratings. These results are robust to a wide set of alternative specifications. We also show that this favorable effect is sensitive to several country’s structural characteristics. Our findings substantiate that the adoption and sound implementation of fiscal rules is a substantial instrument for policy makers to improve developing countries’ financial markets access