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Fiscal institutions, fiscal policy and sovereign risk premia Author info | Abstract | Publisher info | Download info | Related research | Statistics Hallerberg, Mark
Wolff, Guntram B.
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We investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest spreads contained in bond yields of the countries now belonging to the Eurozone. Deficits significantly increase risk premia measured by relative swap spreads. The effect of deficits is significantly lower under EMU. This effect partly results from neglecting the role of fiscal institutions. After controlling for institutional changes, fiscal policy remains a significant determinant of risk premia. We find that better institutions are connected with lower risk premia. Furthermore deficits and surpluses matter less for risk premia in countries with better institutions. This reflects the market perception, that better institutions will reduce fiscal dificulties and make the monitoring of annual developments less important. The results are robust to controlling for country fixed effects and different estimation methodologies. --
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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number
2006,35.
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Date of creation: 2006Date of revision:
Handle: RePEc:zbw:bubdp1:5099Contact details of provider: Postal: Postfach 10 06 02, 60006 Frankfurt Phone: 0 69 / 95 66 - 34 55 Fax: 0 69 / 95 66 30 77 Email: Web page: http://www.bundesbank.de/ More information through EDIRC
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Keywords: Budget institutions ; fiscal rules ; sovereign risk premia ; EMU ; fiscal policy ; government bond yields ; Find related papers by JEL classification: E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G15 - Financial Economics - - General Financial Markets - - - International Financial Markets E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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