Committed to Flexible Fiscal Rules

We study the impact of fiscal rules on macroeconomic performance. To address the endogeneity of rule adoption, we use data on large, random natural disasters. We document empirically that countries with rules perform significantly better following such exogenous shocks than countries without rules. GDP and private consumption are persistently higher. This is associated with more expansionary fiscal policy and hinges on the existence of fiscal space and escape clauses. We rationalize the findings in a model of sovereign default, which replicates the empirical dynamics and shows that tight rules create fiscal space in good times for deficit-spending in bad times