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Rules and risk in the Euro area

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  • Iara, Anna
  • Wolff, Guntram B.

Abstract

We show that stronger fiscal rules in Euro area members reduce sovereign risk premia, in particular in times of market stress. Using a unique data set of rules-based fiscal governance in EU member states, we estimate a model of sovereign spreads that are determined by the probability of default in interaction with the level of risk aversion. The legal base of the rules and their enforcement mechanisms are the most important dimensions of rules-based fiscal governance.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:poleco:v:34:y:2014:i:c:p:222-236
    DOI: 10.1016/j.ejpoleco.2014.02.002
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    More about this item

    Keywords

    Fiscal governance; Numerical fiscal rules; Sovereign spreads; Sovereign risk; Euro area;
    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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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