Rachit Kedia

When a government breaks its own fiscal rules to survive a crisis, what makes anyone believe it will go back? For most emerging and developing economies (EMDEs), the answer is: nothing does. Of the 54 EMDEs with an active escape clause heading into COVID-19, 81% had no legally binding path back to fiscal discipline, just a promise to eventually sort it out. This paper tests whether writing that promise into law actually matters. Using IMF Fiscal Rules Dataset coding locked in before the pandemic, we compare countries with a codified correction mechanism to those with one in name only, and find that codified countries clawed back 2.7 percentage points more of their primary balance from the COVID trough than otherwise-similar countries without one, while a mechanism with no specified return path buys nothing i.e. its effect is statistically indistinguishable from zero. The ad vantage doesn’t come from harsher post-crisis austerity, since expenditure, revenue, and debt adjustments show no effect, but from before the crisis hit: codified countries sim ply ran larger surpluses going in. A probit model adds a troubling wrinkle — codification tracks income, not need, so the countries least likely to write the rule down are the ones most exposed to the next shock.