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How Do Fiscal Rules Impact Investments for Small Open Economies?

  • Central Bank Of Barbados
  • 29 Nov,2021
  • 38
  • Working Papers,
  • Print

This research study investigates the impact of fiscal rules on investments for small open economies (SOEs). A comparative analysis has been conducted on five countries from various regions including the Caribbean, Europe and Latin America. These SOEs are similar to the extent that their policies implemented cannot influence the prices of the goods and services traded on the international market. The period of analysis covered the past two decades, ranging from 2000 up to 2020 and by means of a multimodal approach centred on panel data modelling, we showed that fiscal discipline associated with the presence of fiscal rules could result in stagnated levels of investment. Most of the countries in our study overperformed in meeting their fiscal targets owing to higher-than-expected revenues. Public debt was low and sustainable owing to favourable debt dynamics. However, these SOEs had low execution of public investment despite holding ample fiscal buffers. It appears therefore that the level of stringency associated with fiscal targets and rules could negatively impact investments. Our empirical results offer insights on strategies that could be considered when designing fiscal rules to strengthen the fiscal framework to ensure macroeconomic debt sustainability without compromising overall investment.

How Do Fiscal Rules Impact Investments for Small Open Economies.pdf (1.15 MB)