Can fiscal rules curb income inequality? Evidence from developing countries

Despite a large literature linking fiscal policy and income inequality (IQ), the relationship between fiscal rules (FR) and IQ is severely underexplored. In a large panel of developing countries, propensity score matching estimations reveal that countries that adopted FR experience a significant decrease in their IQ with respect to countries that did not. Economically meaningful, this favorable effect is robust to a wide set of alternative measurement, methodology, and modeling specifications. Moreover, we unveil significant differences among FR: balanced budget and debt rules robustly decrease IQ, contrary to expenditure rules that increase it. Finally, the effect of FR on IQ is subject to heterogeneity related to structural factors. Given the current global IQ trends, our results showing that the FR are not neutral for IQ may provide insightful evidence for governments of countries aiming at adopting FR