Fiscal Rule: A Risk-Based Framework for Reconciling Stability with Flexibility

Global public debt remains elevated and economies face recurrent shocks, leaving fiscal rule design caught between credibility-enhancing discipline and growth-stabilizing flexibility. This paper develops and empirically tests a risk-based framework for a dynamically optimal expenditure-to-output (γ) rule, offering a policy-relevant framework for fiscal risk management aligned with IMF priorities. Theoretically, an open-economy DSGE with endogenous fiscal transparency derives state-contingent γ paths through welfare maximization. Empirically, a panel of 35 economies (2008–2024) is analyzed through a triangulation of System GMM, Structural PVAR, and the Synthetic Control Method to ensure robust identification. Results show that the optimal γ is dynamic: about 0.33 in normal times, 0.45 during financial crises, and 0.50 in the face of extreme shocks. Fiscal transparency significantly amplifies output effects and moderates debt accumulation. These findings provide theoretical foundations and cross-country evidence for risk-based fiscal frameworks.Repository ContentThis repository contains all data and code required to replicate the findings presented in the manuscript. As stated in the paper, all materials are made publicly available to ensure replicability.The repository is organized into two main archives:• E1_GammaRule_Repository/: The main repository containing folders for Data, Model, Empirical analysis, Figures, Documentation, and Validation.• E3_Replication_Appendix/: The appendix containing methods, a link to data, and a README file.