Global Fragmentation, Fiscal Policy, and Economic Growth: A Cross-country Analysis
This paper studies the macroeconomic implications of geopolitical risks and the role of fiscal sustainability in mitigating them. Our empirical analysis exploits a comprehensive database covering 121 countries from 1985 to 2023. We find that, in countries without fiscal rules, geopolitical fragmentation leads to a persistent decline in output and a surge in the debt-to-GDP ratio. However, in countries with fiscal rules, both output and debt are stabilized in the medium- to long-run. Moreover, fiscal rules have a more pronounced effect in countries with high central bank independence, suggesting a novel monetary-fiscal complementarity. We further explore various dimensions of crosscountry heterogeneity, including economic development, political institutions, and climate risks. Finally, fiscal rules promote inclusive growth by mitigating adverse distributional effects of geopolitical risks.
