Rule-Bound but Risk-Prone: Sovereign Debt Risk Under Fiscal Rules in Populist Regimes

This study examines how populist political leadership conditions the relationship between fiscal rules and sovereign debt-crisis risk. Fiscal rules are designed to strengthen discipline by limiting discretionary policymaking, but their credibility depends on the political institutions that enforce them. We develop a signaling framework in which populist pressure increases expected circumvention and weakens the informational value of formal fiscal constraints. Using panel data from 59 advanced and developing economies over 1985–2017, we find a positive and statistically significant interaction between fiscal rules and populist incumbency. Populist incumbency is associated with lower crisis risk where fiscal rules are absent, but this negative association disappears or reverses where fiscal rules are present. The interaction remains positive and statistically significant in subsamples characterized by high macro-political uncertainty, fragmented party systems, weak checks and balances, concentrated executive power, low central bank independence, and a fragile rule of law. Fiscal rules therefore support sustainability only when the surrounding political institutions can preserve their credibility and enforce their constraints.