IDEAS home Printed from https://ideas.repec.org/p/ane/wpcfro/230201.html
   My bibliography  Save this paper

Fiscal Rules, Independent Fiscal Institutions, and Sovereign Risk

Author

Listed:
  • Capraru, Bogdan

    (Romania Fiscal Council)

  • Georgescu, George

    (Romania Fiscal Council)

  • Sprincean, Nicu

    (Romania Fiscal Council)

Abstract

This paper explores the implications of fiscal rules and independent fiscal institutions (IFIs) on sovereign risk. We employ a dynamic panel model for a sample composed of 24 countries members of the European Union over the period 2007-2019 and document that fiscal rules contain sovereign default risk measured by the credit default swap (CDS) spreads on sovereign bonds. IFIs, through monitoring compliance with numerical fiscal rules and assuring the transparency of the budgetary process, lead to a reduction in the likelihood of sovereign default, especially those that went through a process of institutional reform. Moreover, having developed financial markets accompanied by both fiscal rules and independent fiscal institutions contribute to a reduction in sovereign CDS premia against the backdrop of increased sovereign risk induced by more developed financial markets.

Suggested Citation

  • Capraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2023. "Fiscal Rules, Independent Fiscal Institutions, and Sovereign Risk," Working Papers of Romania Fiscal Council 230201, Romania Fiscal Council.
    • Handle: RePEc:ane:wpcfro:230201
    as

    Download full text from publisher

    File URL: http://fiscalcouncil.ro/WP_RFC_no_4_2022.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Caporin, Massimiliano & Pelizzon, Loriana & Ravazzolo, Francesco & Rigobon, Roberto, 2018. "Measuring sovereign contagion in Europe," Journal of Financial Stability, Elsevier, vol. 34(C), pages 150-181.
    2. Kelemen, R. Daniel & Teo, Terence K., 2014. "Law, Focal Points, and Fiscal Discipline in the United States and the European Union," American Political Science Review, Cambridge University Press, vol. 108(2), pages 355-370, May.
    3. Fontana, Alessandro & Scheicher, Martin, 2016. "An analysis of euro area sovereign CDS and their relation with government bonds," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 126-140.
    4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    5. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union [‘Constitutions, politics, and economics’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(54), pages 298-362.
    6. Ant�nio Afonso & Ana Sofia Guimarães, 2015. "The relevance of fiscal rules for fiscal and sovereign yield developments," Applied Economics Letters, Taylor & Francis Journals, vol. 22(11), pages 920-924, July.
    7. Eric M. Leeper, 2010. "Monetary science, fiscal alchemy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-434.
    8. Chen, Hsien-Yi & Chen, Sheng-Syan, 2018. "Quality of government institutions and spreads on sovereign credit default swaps," Journal of International Money and Finance, Elsevier, vol. 87(C), pages 82-95.
    9. Simon Gilchrist & Bin Wei & Vivian Z. Yue & Egon Zakrajšek, 2021. "Sovereign Risk and Financial Risk," NBER Chapters, in: NBER International Seminar on Macroeconomics 2021, National Bureau of Economic Research, Inc.
    10. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
    11. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, April.
    12. Afonso, António & Furceri, Davide & Gomes, Pedro, 2012. "Sovereign credit ratings and financial markets linkages: Application to European data," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 606-638.
    13. Juan Gabriel Fernández & Francisco Parro, 2019. "Fiscal Rules and Financial Systems: Complements or Substitutes?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(3), pages 588-616, June.
    14. Iara, Anna & Wolff, Guntram B., 2014. "Rules and risk in the Euro area," European Journal of Political Economy, Elsevier, vol. 34(C), pages 222-236.
    15. Cristina Checherita-Westphal & Sebastian Hauptmeier & Nadine Leiner-Killinger, 2022. "The Euro Area in Between Crises? Considerations on Fiscal Policies and Rules," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(5), pages 278-282, September.
    16. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    17. Stefan Avdjiev & Bryan Hardy & Şebnem Kalemli-Özcan & Luis Servén, 2022. "Gross Capital Flows by Banks, Corporates, and Sovereigns," Journal of the European Economic Association, European Economic Association, vol. 20(5), pages 2098-2135.
    18. Gilchrist, Simon & Wei, Bin & Yue, Vivian Z. & Zakrajšek, Egon, 2022. "Sovereign risk and financial risk," Journal of International Economics, Elsevier, vol. 136(C).
    19. Beetsma, Roel & Debrun, Xavier & Fang, Xiangming & Kim, Young & Lledó, Victor & Mbaye, Samba & Zhang, Xiaoxiao, 2019. "Independent fiscal councils: Recent trends and performance," European Journal of Political Economy, Elsevier, vol. 57(C), pages 53-69.
    20. James M. Poterba & Kim Rueben, 1999. "State Fiscal Institutions and the U.S. Municipal Bond Market," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 181-208, National Bureau of Economic Research, Inc.
    21. Laura Alfaro, 2016. "Fiscal Rules and Sovereign Default," 2016 Meeting Papers 209, Society for Economic Dynamics.
    22. Giovanni S. F. Bruno, 2005. "Estimation and inference in dynamic unbalanced panel-data models with a small number of individuals," Stata Journal, StataCorp LP, vol. 5(4), pages 473-500, December.
    23. Bergman, U. Michael & Hutchison, Michael M. & Hougaard Jensen, Svend E., 2019. "European policy and markets: Did policy initiatives stem the sovereign debt crisis in the euro area?," European Journal of Political Economy, Elsevier, vol. 57(C), pages 3-21.
    24. Roel Beetsma, 2022. "The Economics of Fiscal Rules and Debt Sustainability," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(1), pages 11-15, January.
    25. Cezara Vinturis, 2022. "A multi-speed fiscal Europe? Fiscal rules and fiscal performance in the EU former communist countries," Post-Communist Economies, Taylor & Francis Journals, vol. 34(2), pages 149-172, February.
    26. Junye Li & Gabriele Zinna, 2018. "How Much of Bank Credit Risk Is Sovereign Risk? Evidence from Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1225-1269, September.
    27. Galariotis, Emilios C. & Makrichoriti, Panagiota & Spyrou, Spyros, 2016. "Sovereign CDS spread determinants and spill-over effects during financial crisis: A panel VAR approach," Journal of Financial Stability, Elsevier, vol. 26(C), pages 62-77.
    28. Beetsma, Roel & Debrun, Xavier & Sloof, Randolph, 2022. "The political economy of fiscal transparency and independent fiscal councils," European Economic Review, Elsevier, vol. 145(C).
    29. Sawadogo, Pegdéwendé Nestor, 2020. "Can fiscal rules improve financial market access for developing countries?," Journal of Macroeconomics, Elsevier, vol. 65(C).
    30. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2005. "An Empirical Analysis of the Dynamic Relation between Investment‐Grade Bonds and Credit Default Swaps," Journal of Finance, American Finance Association, vol. 60(5), pages 2255-2281, October.
    31. Căpraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2022. "Do independent fiscal institutions cause better fiscal outcomes in the European Union?," Economic Systems, Elsevier, vol. 46(2).
    32. Blommestein, Hans & Eijffinger, Sylvester & Qian, Zongxin, 2016. "Regime-dependent determinants of Euro area sovereign CDS spreads," Journal of Financial Stability, Elsevier, vol. 22(C), pages 10-21.
    33. Heinemann, Friedrich & Osterloh, Steffen & Kalb, Alexander, 2014. "Sovereign risk premia: The link between fiscal rules and stability culture," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 110-127.
    34. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    35. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2022. "Numerical Fiscal Rules for Economic Unions: the Role of Sovereign Spreads," Working Papers 147, Red Nacional de Investigadores en Economía (RedNIE).
    36. Hatchondo, Juan Carlos & Martinez, Leonardo & Roch, Francisco, 2022. "Numerical fiscal rules for economic unions: The role of sovereign spreads," Economics Letters, Elsevier, vol. 210(C).
    37. Serhan Cevik & Belma Öztürkkal, 2021. "Contagion of fear: Is the impact of COVID‐19 on sovereign risk really indiscriminate?," International Finance, Wiley Blackwell, vol. 24(2), pages 134-154, August.
    38. Patrícia Martins & Leonida Correia, 2021. "Fiscal institutions: different classifications and their effectiveness," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(1), pages 159-190, March.
    39. Andrieș, Alin Marius & Ongena, Steven & Sprincean, Nicu, 2021. "The COVID-19 Pandemic and Sovereign Bond Risk," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    40. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    41. Juha Kilponen & Helinä Laakkonen & Jouko Vilmunen, 2015. "Sovereign Risk, European Crisis-Resolution Policies, and Bond Spreads," International Journal of Central Banking, International Journal of Central Banking, vol. 11(2), pages 285-323, March.
    42. Gomez-Gonzalez, Jose E. & Valencia, Oscar M. & Sánchez, Gustavo A., 2022. "How fiscal rules can reduce sovereign debt default risk," Emerging Markets Review, Elsevier, vol. 50(C).
    43. Hansen, Daniel, 2020. "The effectiveness of fiscal institutions: International financial flogging or domestic constraint?," European Journal of Political Economy, Elsevier, vol. 63(C).
    44. Sebastian Barnes, 2022. "EU Fiscal Governance Reforms: A Perspective of Independent Fiscal Institutions," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(1), pages 21-25, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brändle, Thomas & Elsener, Marc, 2023. "Do fiscal rules matter? A survey on recent evidence," Working papers 2023/07, Faculty of Business and Economics - University of Basel.
    2. Ablam Estel APETI & Bao-We-Wal BAMBE & Jean Louis COMBES, 2022. "On the Macroeconomic Effects of Fiscal Reforms : Fiscal Rules and Public Expenditure Efficiency," LEO Working Papers / DR LEO 2985, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    3. Montes, Gabriel Caldas & Souza, Ivan, 2020. "Sovereign default risk, debt uncertainty and fiscal credibility: The case of Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Căpraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2022. "Do independent fiscal institutions cause better fiscal outcomes in the European Union?," Economic Systems, Elsevier, vol. 46(2).
    5. J. Alsubaiei, Bader & Calice, Giovanni & Vivian, Andrew, 2021. "Sovereign CDS and mutual funds: Global evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    6. López-Herrera, Carmen & Cordero, José M. & Pedraja-Chaparro, Francisco & Polo, Cristina, 2023. "Fiscal rules and their influence on public sector efficiency," MPRA Paper 119018, University Library of Munich, Germany.
    7. Capraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2020. "An evaluation of IFIs impact on EU countries budget deficits," Working Papers of Romania Fiscal Council 201101, Romania Fiscal Council.
    8. Petrick, Martin & Zier, Patrick, 2012. "Common Agricultural Policy effects on dynamic labour use in agriculture," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 37(6), pages 671-678.
    9. Moratis, Georgios & Sakellaris, Plutarchos, 2021. "Measuring the systemic importance of banks," Journal of Financial Stability, Elsevier, vol. 54(C).
    10. Bergman, U. Michael & Hutchison, Michael M. & Jensen, Svend E. Hougaard, 2016. "Promoting sustainable public finances in the European Union: The role of fiscal rules and government efficiency," European Journal of Political Economy, Elsevier, vol. 44(C), pages 1-19.
    11. Augustin, Patrick & Sokolovski, Valeri & Subrahmanyam, Marti G. & Tomio, Davide, 2022. "In sickness and in debt: The COVID-19 impact on sovereign credit risk," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1251-1274.
    12. Benbouzid, Nadia & Mallick, Sushanta K. & Sousa, Ricardo M., 2017. "An international forensic perspective of the determinants of bank CDS spreads," Journal of Financial Stability, Elsevier, vol. 33(C), pages 60-70.
    13. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    14. Gootjes, Bram & de Haan, Jakob, 2022. "Do fiscal rules need budget transparency to be effective?," European Journal of Political Economy, Elsevier, vol. 75(C).
    15. Braunfels, Elias, 2014. "How do Political and Economic Institutions Affect Each Other?," Discussion Paper Series in Economics 19/2014, Norwegian School of Economics, Department of Economics.
    16. Ablam Estel Apeti & Bao-We-Wal Bambe & Jean-Louis Combes & Eyah Denise Edoh, 2023. "Original Sin: Fiscal Rules and Government Debt in Foreign Currency in Developing Countries," Working Papers hal-04130477, HAL.
    17. Baharumshah, Ahmad Zubaidi & Slesman, Ly & Wohar, Mark E., 2016. "Inflation, inflation uncertainty, and economic growth in emerging and developing countries: Panel data evidence," Economic Systems, Elsevier, vol. 40(4), pages 638-657.
    18. Zheng, Xinye & Li, Fanghua & Song, Shunfeng & Yu, Yihua, 2013. "Central government's infrastructure investment across Chinese regions: A dynamic spatial panel data approach," China Economic Review, Elsevier, vol. 27(C), pages 264-276.
    19. Tadadjeu, Sosson & Njangang, Henri & Asongu, Simplice A. & Kamguia, Brice, 2023. "Natural resources, child mortality and governance quality in African countries," Resources Policy, Elsevier, vol. 83(C).
    20. Claire Giordano, 2023. "Revisiting the real exchange rate misalignment‐economic growth nexus via the across‐sector misallocation channel," Review of International Economics, Wiley Blackwell, vol. 31(4), pages 1329-1384, September.

    More about this item

    Keywords

    Fiscal rules; independent fiscal institutions; sovereign CDS spreads; sovereign risk;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ane:wpcfro:230201. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dan Mateescu (email available below). General contact details of provider: https://edirc.repec.org/data/rocofro.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.