The costs of fiscal volatility: Evidence from firm-level data in developing countries

A large body of macroeconomic evidence suggests that volatility is detrimental to eco-nomic growth, yet micro-level evidence remains scarce, particularly for volatility stemming from fiscal policy. This paper examines the growth implications of fiscal volatility at the firm level. Combining country-level measures of discretionary fiscal volatility with harmonized firm-level data from the World Bank Enterprise Surveys for 58,400 firms across 74 developing countries from 2008 to 2020, we provide robust evidence that fiscal volatility significantly reduces firm sales growth. The results reveal substantial heterogeneity: medium and large firms are more resilient, while there is no mitigating effect for small firms. State-owned firms and exporters experience sharper declines. Mechanism analysis points to both demand- and supply-side channels. These findings point to the importance of predictable and well-anchored fiscal policy frameworks for supporting private sector growth in developing economies.