Fiscal Rules and Financial Systems: Complements or Substitutes?

Juan Gabriel Fernández, Francisco Parro

Research output: Contribution to journalArticlepeer-review

2 Scopus citations


We study the effect of fiscal rules on a country's credit rating and their interaction with financial development. We build a rich set of panel data, which includes a novel index for the strength of fiscal rules. We find a positive and significant effect of fiscal rules on sovereign ratings. We also find that this effect is attenuated in economies with a more developed domestic financial system. Therefore, financial markets act as a substitute for fiscal rules in lowering the default risk assessed by credit rating agencies. This substitution effect between fiscal rules and financial development is mostly triggered through the monitoring and enforcement dimension of fiscal rules.

Original languageEnglish (US)
Pages (from-to)588-616
Number of pages29
JournalOxford Bulletin of Economics and Statistics
Issue number3
StatePublished - Jun 2019

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty


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