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Fiscal Rules, Independent Fiscal Institutions and Sovereign Risk: Evidence From the European Union

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  • Bogdan Căpraru
  • George Georgescu
  • Nicu Sprincean

Abstract

This paper examines the effects of fiscal rules (FRs) and independent fiscal institutions (IFIs) on sovereign risk. To address potential endogeneity issues, we employ the System Generalised Method of Moments (GMM) estimator in an analysis comprising 24 European Union member states throughout the 2007–2019 period. Our results indicate that FRs are effective in mitigating sovereign default risk, as measured by credit default swap (CDS) spreads on sovereign bonds. In addition, we document that Member States with better numerical compliance rates with European Union fiscal rules have lower sovereign CDS spreads and thus lower risk. By overseeing and fostering compliance with numerical fiscal targets and enhancing the transparency of the budgetary process, IFIs exert a beneficial impact on the probability of sovereign default, particularly those subject to institutional reforms. Furthermore, more developed financial markets supported by both FRs and IFIs contribute to a reduction in sovereign CDS premiums. Our findings have critical policy implications against the backdrop of European economic and fiscal governance reform.

Suggested Citation

  • Bogdan Căpraru & George Georgescu & Nicu Sprincean, 2026. "Fiscal Rules, Independent Fiscal Institutions and Sovereign Risk: Evidence From the European Union," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 31(1), pages 29-45, January.
    • Handle: RePEc:wly:ijfiec:v:31:y:2026:i:1:p:29-45
    DOI: 10.1002/ijfe.3127
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    References listed on IDEAS

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    1. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 60-82.
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