https://macropaperwarehouse.com/authors/laura-pagenhardt/Laura PagenhardtHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/committed-to-flexible-fiscal-rules/https://macropaperwarehouse.com/papers/committed-to-flexible-fiscal-rules/<p>A central debate in fiscal policy is whether fiscal rules—numerical constraints on budget deficits or debt levels—impair a government&rsquo;s ability to respond to adverse economic shocks, creating a fundamental trade-off between debt stabilization and macroeconomic stabilization. This paper uses data on large, random natural disasters as exogenous shocks to address the endogeneity of rule adoption and provides new empirical and theoretical evidence on this trade-off. Contrary to the trade-off hypothesis, countries with fiscal rules perform significantly better following such disasters than countries without rules: GDP and private consumption are persistently higher, and fiscal policy is significantly more expansionary. The superior performance is shown to depend on the existence of prior fiscal space and the presence of escape clauses in the rules. A model of sovereign default with endogenous fiscal space and tax plans rationalizes these findings: tight rules prevent myopic governments from accumulating excessive debt in good times, which creates fiscal space for deficit spending when disasters strike, keeping sovereign spreads lower and enabling more expansionary fiscal responses.</p>