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Sovereign risk premia: The link between fiscal rules and stability culture

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  • Heinemann, Friedrich
  • Osterloh, Steffen
  • Kalb, Alexander

Abstract

There is a growing empirical literature studying whether permanent constraints on fiscal policy, such as fiscal rules, reduce sovereign risk premia. Nevertheless, it remains an open question whether these rules are effective genuinely or just because they mirror fiscal preferences of politicians and voters. In our analysis of European bond spreads before the financial crisis, we shed light on this issue by employing several types of stability preference related proxies. These proxies refer to a country's past stability performance, government characteristics and survey results related to general trust. We find evidence that these preference indicators affect sovereign bond spreads and dampen the measurable impact of fiscal rules. Yet, the interaction of stability preferences and rules points to a particular potential of fiscal rules to restore market confidence in countries with a historical lack of stability culture.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 41 (2014)
Issue (Month): C ()
Pages: 110-127

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Handle: RePEc:eee:jimfin:v:41:y:2014:i:c:p:110-127

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Sovereign risk premia; Fiscal rules; Debt crisis; Bond markets; Fiscal preferences;

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References

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Cited by:
  1. Moessinger, Marc-Daniel & Feld, Lars P. & Kalb, Alexander & Osterloh, Steffen, 2013. "Sovereign Bond Market Reactions to Fiscal Rules and No-Bailout Clauses The Swiss Experience," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79807, Verein für Socialpolitik / German Economic Association.
  2. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
  3. Ciaglia, Sarah & Heinemann, Friedrich, 2012. "Debt rule federalism: The case of Germany," ZEW Discussion Papers 12-067, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Matthias Bauer, 2013. "Political Aversion To a Multilateral Fiscal Rule: The Dynamic Commitment Problem in European Fiscal Governance," Global Financial Markets Working Paper Series 44-2013, Friedrich-Schiller-University Jena.

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