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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 fiscal rules reduce borrowing costs. 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, 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 have an influence on risk premia and dampen the measurable impact of fiscal rules. Yet, the interaction of stability preferences and rules points to a particular potential of fiscal rules in countries with a historically low stability culture. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 13-016.

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Date of creation: 2013
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Handle: RePEc:zbw:zewdip:13016

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Keywords: fiscal preferences; fiscal rules; debt crisis; bond markets;

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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. 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.
  3. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
  4. 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.
  5. Pierre Mandon, 2014. "Evaluating Treatment Effect and Causal Effect of Fiscal Rules on Procyclicality," Working Papers hal-01015439, HAL.

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