Fiscal discipline continued to improve in most cases after the frameworks and rules were established, suggesting they became devices that formalized a preexisting commitment by the governments to maintain fiscal discipline. The evidence also indicates that these frameworks and rules have become key mechanisms to maintain fiscal discipline beyond the political cycles and changes in the political leadership of the country such as in the case of Chile or community of nations such as in the case of the European Union. The evidence in Tables 1 and 2 supports suggests that a record of fiscal discipline would be required to put in place a credible fiscal framework, and that such a framework would serve to reinforce that initial commitment.

The results for the volatility of GDP growth show that in seven out of twelve cases volatility declined after the rule and in nine cases volatility declined compared to same data for the indicated control groups (called benchmarks in Table 2). The results are even more powerful for the public debt and government balance. In eleven out of twelve cases the ratio of public debt to GDP fell in the years after the rule and in ten cases the ratio fell compared to the benchmarks.<sup>8</sup> The government balance improved in all cases after the rules were established and also improved in all cases compared to the benchmarks.

The results for the country risk indicators suggest that foreign investor sentiment improved in all cases after the rule and also when compared to the benchmarks. This is in line with the evidence pointing to the positive correlation between the perceived credibility in the country commitment to fiscal discipline and positive market sentiment (see also Kopits 2004b; and Kaminsky and Reinhart 1999).

Although the evidence suggests that effective fiscal frameworks and rules contribute to reducing the public debt, improving the fiscal accounts, and strengthening foreign investor sentiment the degree of success that has accompanied the adoption of fiscal frameworks and countercyclical fiscal policies has been mixed.

Chile’s structural budget surplus framework and fiscal rules have strengthened the effects of its automatic stabilizers and open room for countercyclical fiscal actions. In 2001, Chile experienced a slowdown in economic growth and the structural surplus rule allowed its budget balance to deteriorate to accommodate a cyclical downturn. Its country risk indicators demonstrate that despite adverse external developments market confidence in Chile’s economic policies improved during this period. The new fiscal rules have strengthened the response of fiscal policy to economic fluctuations and provided the conditions for a more stable monetary regime (Marshall 2003). Chile has also been able to adopt an expansive discretionary fiscal policy during 2009 in order to

> 8 The data are in most cases for the general government gross debt according to the System of National Accounts (SNA) definition. Gross debt according to the Maastricht criteria differs from the SNA data. Gross debt in the Maastricht definition does not include trade credits and advances, or shares and insurance technical reserves, and government bonds are recorded at nominal values. According to the SNA methodology government bonds are valued at their market price or at their issue price plus accrued interest. Accordingly the gross public debt data in Table 2 is higher compared to the Maastricht criteria. The differences vary between from about 1 percentage point to about 10 percentage points in some cases, such as France in 2006 (OECD Economic Outlook 82 Database).

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