Fiscal Rules and Green Investments in Developing Countries

Abstract

This study highlights the effect of Fiscal Rules(FR) on Green Investments(GI) in developing countries. We analyze the causal effect of adopting rules on green financing using the entropy balancing method in 78 countries. Two hypotheses are tested in this study. The first one states that adopting Fiscal Rules increases green financing, and the second one is related to the ability of different types of rules to attract more investments to fight climate change. First, the results are robust and show that adopting Fiscal Rules increases climate finance. Unlike expenditure rules, deficit, debt, and revenue rules positively affect green financing. The effect of Fiscal Rules on green finance is amplified in countries with strong economic performance, high levels of democracy, good- quality institutions, and a well-functioning state apparatus. On the other hand, the effect of the rules is mitigated in the presence of high natural resource rents. JEL Classification : E60 ; E62 ; Q5