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Do fiscal rules shape private-sector investment decisions?

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  • Sawadogo, Rayangnewendé Frans

Abstract

We investigate whether fiscal rules impact private domestic investment. Using data spanning 100 advanced and developing countries over the period 1990–2019 and applying the entropy balancing method, we reveal that implementing fiscal rules significantly improves private-sector investment. This finding is robust to a wide set of economic and econometric tests. Moreover, we perform a range of heterogeneity tests and find that the effect of fiscal rules only applies in developing countries and is amplified in good times and in countries with a strong fiscal stance. However, the benefits of fiscal rules are mitigated in resource-rich countries and during economic crises. Finally, we explore the underlying mechanisms and show that fiscal discipline, a composition effect fostering public investment, and macroeconomic stability are three driving forces that produce the stimulative effect of fiscal rules.

Suggested Citation

  • Sawadogo, Rayangnewendé Frans, 2024. "Do fiscal rules shape private-sector investment decisions?," Journal of Macroeconomics, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:jmacro:v:81:y:2024:i:c:s0164070424000326
    DOI: 10.1016/j.jmacro.2024.103617
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    More about this item

    Keywords

    Fiscal rules; Private domestic investment; Entropy balancing;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

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