Title : Flexible Boundaries: Evaluating the Effect of Escape Clause Activation
Author(s) : Carolina Ulloa-Suárez, Oscar Valencia, Jorge Guerra
Abstract : This paper investigates the impact of escape clause (EC) activation within fiscal rule (FR) frameworks, focusing on macroeconomic and financial variables. Leveraging the Synthetic Control Method (SCM), we estimate the effects of EC activation on debtto-GDP ratios, the Emerging Markets Bond Index (EMBI), and Credit Default Swaps (CDS). Our analysis spans both emerging and advanced economies that activated ECs during major shocks, including the Global Financial Crisis and the COVID-19 pandemic. A key methodological contribution is the integration of machine learning-based clustering techniques to enhance donor pool selection, thereby strengthening the robustness of SCM estimates. The findings reveal that EC activation lowers debt levels, reduces sovereign risk premiums, and increases fiscal space, with effects on financial variables persisting for two to twelve months. These results underscore the dual role of ECs in enabling fiscal flexibility while safeguarding the fiscal discipline objectives embedded in FR frameworks.
Key-words : Fiscal rules, Fiscal policy, Escape Clauses, Flexibility.
JEL Classification : E62, H61, H68
