Can fiscal rules boost business confidence? An empirical analysis for OECD countries

Abstract The aim of this study is to investigate the relationship between the adoption of fiscal rules and business confidence. To achieve this, we conducted an empirical analysis using a panel of 33 OECD countries from 2010 to 2021. The results suggest that the adoption of fiscal rules, whether at a national or supranational level, tends to increase business confidence. Additionally, among various types of fiscal rules, budget rules are the most effective. Investigating the role of fiscal rule design, we find that merely adopting the rules is not enough; they must be flexible to increase business confidence. Several factors influence the relationship between fiscal rules and agents’ confidence. When a country has a surplus (deficit), the positive effect of fiscal rules on business confidence is amplified (reduced). The country’s level of development, and the state of business confidence are key determinants of their effectiveness. In developing countries, fiscal rules tend to reduce business confidence. Furthermore, when business confidence is pessimistic, fiscal rules also have a negative impact.