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Rules and risk in the euro area: does rules-based national fiscal governance contain sovereign bond spreads?

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Author Info

  • Anna Iara
  • Guntram B. Wolff

Abstract

The strengthening of national fiscal frameworks, including numerical fiscal rules, has recently been proposed as an important part of the economic governance reform package for the EU. The strength of numerical fiscal rules can be described along the dimensions of their statutory base, the room to revise budgetary objectives, provisions for their monitoring and enforcement, and their media visibility. With a unique data set summarizing the quality of national fiscal rules along these dimensions, we show that stronger fiscal rules in euro area member states reduce sovereign risk. According to our estimates, yield spreads against Germany of countries with relatively weak fiscal rules could be up to 100 basis points lower if they upgraded their numerical fiscal rules. The legal base turns out to be the most important dimension for the perceived effectiveness of the rules. The effectiveness of the correction and enforcement mechanisms turns out to be very important as well, while the role of the bodies in charge of monitoring and enforcing compliance is somewhat smaller. Overall, national fiscal rules are found to be beneficial for market assessments of governments' ability and willingness to timely service debt: they could thus provide an effective way to implement fiscal discipline.

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File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2010/ecp433_en.htm
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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 433.

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Length: 30 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:euf:ecopap:0433

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Cited by:
  1. Georgia Kaplanoglou & Vassilis T. Rapanos, 2011. "The Greek fiscal crisis and the role of fiscal governance," LSE Research Online Documents on Economics 36432, London School of Economics and Political Science, LSE Library.
  2. Agnieszka SzczypiƄska, 2012. "Does the halo effect still hold? Implications for the euro-candidates from the analysis of the EA bond market - the crisis perspective," Working Papers 15, Ministry of Finance in Poland.

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