Aguilera-Torres, Boris, Talbot-Wright, Hipólito and Villena, Mauricio G. (2025) Fiscal rules, escape clauses, and credit markets: evidence from financial crises. Economics Letters, 256. ISSN 0165-1765
Full text not available from this repository.Abstract
This paper investigates whether escape clauses in fiscal rules mitigate the negative effects of financial crises on domestic credit markets. Using a dynamic panel of 56 countries from 1985 to 2015, we estimate the impact of escape clauses on both domestic bank credit and sovereign bond spreads during crises. Our results show that escape clauses significantly soften the contraction in credit and reduce sovereign borrowing costs when crises occur. In contrast, discretionary fiscal deviations—those not supported by legal clauses—fail to produce similar benefits. These findings suggest that institutionalized fiscal flexibility plays a stabilizing role in periods of financial distress by supporting market confidence and access to finance. To our knowledge, this is among the first empirical studies to assess the role of escape clauses during idiosyncratic banking crises.
| Item Type: | Article |
|---|---|
| Additional Information: | © 2025 Elsevier B.V. |
| Divisions: | LSE |
| Date Deposited: | 14 Oct 2025 10:39 |
| Last Modified: | 14 Oct 2025 17:51 |
| URI: | http://eprints.lse.ac.uk/id/eprint/129795 |
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