Under what conditions do countries comply with their fiscal policy rules? We tackle this question in the context of emerging countries, with a specific focus on Latin America and the Caribbean, a region where fiscal rules have become increasingly common in recent decades. Based on an original dataset of compliance behavior across 14 countries observed between 2000 and 2020, we first document that complying with fiscal rules makes a difference in terms of fiscal performance. We then show that compliance is affected by rule-specific features and the broader macroeconomic and politico-institutional environment. Our findings contribute to the literature by showing the relevant design features and pre-conditions that may foster or inhibit the successful implementation of rules-based fiscal frameworks in emerging markets.

This paper empirically examines which factors have influenced numerical compliance with fiscal rules in Latin American and Caribbean countries over the period 2000 to 2020. We use logistic regression models to associate three groups of specific factors with a greater or lesser probability of compliance with the rule: the macroeconomic and political environment of the countries and the design features of the enforced rules. We find that only changes in the macroeconomic and political context affect the probability of compliance with the enforced rules. In contrast, the institutional design of the fiscal rules does not seem to play an essential role in the compliance outcome. This result suggests that adjustments in this direction are not decisive for rule compliance.

This paper introduces a dataset that gathers information on whether and how Latin America and the Caribbean (LAC) have complied with or deviated from implemented fiscal rules. It provides annual data on fiscal rules for 14 LAC countries from 2000 to 2020, and it considers the design features of the rules and information about numerical compliance. It provides descriptive statistics reflecting the panorama of the fiscal rules implemented in LAC countries. Additionally, it calculates compliance rates across countries, years, and rules. On average, this study finds that compliance with rules aiming to constrain debt ratios and structural balances is the highest, while compliance with fiscal balance and expenditure rules is the lowest. Furthermore, the data collection process revealed that LAC countries still have room for discretion even when they subject their fiscal policy to rules. To address this problem, the paper proposes an adjusted compliance index that considers different elements that add degrees of discretion to the rule. The study finds that the numerical compliance rates of each country are likely to be over-estimated once discretionary actions are accounted for.

Fiscal rules in Latin American and Caribbean (LAC) countries rarely have fixed objectives, exhibiting significant heterogeneity in design and implementation. This document analyzes how different factors influence the ease or difficulty of compliance with these rules and introduces an update of the Compliance dataset, highlighting new trends. The updated dataset shows that fiscal rule compliance in the region is sensitive to economic conditions, with a notable peak in 2022 due to favorable circumstances. However, the seemingly high compliance in 2022 was largely driven by favorable conditions, masking underlying vulnerabilities, as evidenced by the decline in 2023 and the emerging risks of non-compliance in 2024. This pattern suggests that compliance can sometimes misrepresent both short-term and long-term fiscal health. The analysis underscores the need to rethink fiscal rule frameworks to ensure long-term discipline and coherence with fiscal commitments. A new classification of rules in LAC can help understand compliance dynamics, close the gap between short- and long-term fiscal objectives, and identify specific characteristics to improve. This document emphasizes the necessity for targeted reforms to enhance the resilience and effectiveness of fiscal frameworks in the LAC region.

This paper examines the macroeconomic and fiscal benefits of reducing inefficiencies in public sector wages, with a focus on the public–private wage premium. Using cross-country empirical evidence, along with a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to Latin America and the Caribbean, we show that narrowing the wage gap yields substantial benefits. A one percentage point reduction in the premium improves the primary balance, lowers debt, and raises output and private employment, without generating inflationary pressures. Extensions show that the adjustment mechanism is key: gains are larger and faster when wage rigidities are limited and reforms are sustained, while employment cuts provide stronger fiscal relief at higher economic costs. These results underscore the importance of efficient and well-designed compensation policies in enhancing fiscal sustainability and promoting long-term macroeconomic stability. 

Fiscal rules are intended to support sustainable public finances, yet whether compliance with these rules actually improves fiscal sustainability remains an open question. This paper provides the first cross-country causal assessment of the effects of fiscal rule compliance on governments’ fiscal behavior and borrowing conditions. We extend the fiscal reaction function to allow both the primary balance response and the growth-adjusted interest rate to depend on compliance, and address endogeneity using external instruments based on exogenous peer behavior across spatial and rating networks combined with System GMM. The results show that compliance substantially strengthens the fiscal response to rising debt and lowers the interest–growth differential, indicating that financial markets react to credible implementation rather than to the existence of rules alone. These effects intensify under high-debt conditions, where compliant governments adjust more forcefully and experience larger improvements in borrowing terms. Our analysis shows that compliance meaningfully enhances both fiscal reaction and financing conditions, but its contribution to sustainability ultimately depends on credible enforcement. Policy efforts should therefore prioritize the capacity and incentives needed for governments to effectively comply with their rules, not merely adopt them.

This paper investigates the impact of escape clause (EC) activation within fiscal rule (FR) frameworks, focusing on both macroeconomic and financial variables. Using the Synthetic Control Method (SCM), we estimate the effects of EC activation on the debt-to-GDP ratio and the Emerging Markets Bond Index (EMBI). Our analysis covers emerging and advanced economies that activated ECs during major shocks, such as the Global Financial Crisis and the COVID-19 pandemic. A key innovation of this paper is the use of machine learning-based clustering techniques to refine donor pool selection, significantly enhancing the robustness of the SCM. Our results show that EC activation leads to lower debt levels, reduced interest rates, and increased fiscal space, with effects on interest rates lasting between two and four months. Our results underscore how EC activation provides necessary flexibility while preserving the broader objectives of fiscal discipline in FR frameworks.

Implementing fiscal rules has become a widespread mechanism to achieve better control over macroeconomic aggregates and improve fiscal sustainability. However, while the analysis of the budgetary effects of fiscal rules is well documented, its re-distributive dimension has been less explored. This paper analyses the effect of implementing fiscal rules on income inequality in four Latin American countries: Brazil, Chile, Colombia, and Mexico. Using the synthetic control approach, I find evidence that the implementation of fiscal rules is not likely to result in increased levels of income inequality. This result is robust to different measures of income inequality. Further, with a country-specific analysis of the economic and legal design of the enforced fiscal rules, I show that consistency with current economic policies is essential and best explains the lack of social costs. Overall, the results suggest that any economic stigma that may prevent countries from implementing fiscal rules because of unwanted side effects on income inequality is unwarranted.

This paper proposes a new empirical framework to investigate the sustainability of public finances in European countries, considering the dynamics of government debt ratios, the primary balance, and interest rates jointly. We show that sustainability can be defined as a situation where the non-explosive paths of the debt and primary balance ratio are consistent with a low-interest rate-growth differential that varies across countries. However, governments must also commit to reducing their primary deficits when the overall fiscal balance and debt ratios depart strongly from their target defined by their fiscal rules. Under our approach, we observe an unexpected result for European Union countries: when fiscal rules are too strict, public finances can become unsustainable. Furthermore, we find that debt ratios are sustainable under the Stability and Growth Pact, while under the new Treaty on Stability, Coordination, and Governance, they are not.

This paper introduces the Escape Clause Clarity Index, designed to evaluate how effectively escape clause definitions balance crisis response with long-term fiscal responsibility in Latin America and the Caribbean (LAC). The index assesses six dimensions: Triggers and Conditions, Activation Responsibility, Activation Timeline and Return to Objectives, Procedures for Activation and Compliance, Control Mechanisms, and Communication Strategies. The scores reveal both strengths and common weaknesses among LAC countries, highlighting critical areas for improvement, such as activation procedures and returning to fiscal rule objectives. Clear procedures and alternative scenarios are vital, particularly given the increasing frequency of climate change and natural disasters. By implementing these measures, the effectiveness, transparency, and credibility of escape clauses can be enhanced, helping countries to navigate economic shocks while maintaining fiscal discipline and sustainability.

This paper examines whether Independent Fiscal Institutions (IFIs) improve the accuracy of governments’ macro-fiscal forecasts. Using real-time, ex ante budget projections for 55 EU and LAC countries from 1998–2023, we analyze how IFI oversight reduces the optimism bias that undermines fiscal credibility. Stylized facts reveal systematic over-optimism in GDP, revenue, and deficit forecasts and a strong co-movement between growth and fiscal forecast errors, consistent with theoretical expectations. Exploiting the staggered adoption of IFIs with difference-in-differences and other robust estimators, we find that IFIs significantly enhance forecast accuracy: GDP forecast errors fall within two years of creation, while improvements in revenue and expenditure forecasts appear after four to six years. Effects are stronger where IFIs produce or endorse official forecasts. Overall, IFIs act as institutional safeguards against unrealistic projections, complementing fiscal rules and strengthening governments’ fiscal credibility over time.