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The effect of fiscal announcements on interest spreads: Evidence from the Netherlands

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  • Jasper de Jong

Abstract

We estimate the effect of consolidation efforts on investors' perception of government's solvency. To this end, we analyze announcements by Dutch government officials between September 2008 and December 2014 and select those messages that contain relevant new information on the likelihood and substance of consolidation packages. We then scrutinize whether announcements affect the yield spread of Dutch ten year government bonds vis-à-vis German bonds. Our findings indicate that announcements hinting at improvements in the budget balance significantly lowered yield spreads. As most announcements involve events during the negotiation process on consolidation packages rather than the official date of agreement or implementation of these packages, our results illustrate the importance of accurately assessing the news content of messages.

Suggested Citation

  • Jasper de Jong, 2018. "The effect of fiscal announcements on interest spreads: Evidence from the Netherlands," DNB Working Papers 584, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:584
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    1. Beetsma, Roel & Furtuna, Oana & Giuliodori, Massimo & Mumtaz, Haroon, 2021. "Revenue- versus spending-based fiscal consolidation announcements: Multipliers and follow-up," Journal of International Economics, Elsevier, vol. 131(C).
    2. Mr. Jaime Guajardo & Mr. Antonio David & Juan Yepez, 2019. "The Rewards of Fiscal Consolidation: Sovereign Spreads and Confidence Effects," IMF Working Papers 2019/141, International Monetary Fund.
    3. Samir Kadiric, 2020. "The determinants of sovereign risk premiums in the UK and the European government bond market: The impact of Brexit," EIIW Discussion paper disbei271, Universitätsbibliothek Wuppertal, University Library.

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    More about this item

    Keywords

    Fiscal policy announcements; Consolidation measures; Interest spreads; Political processes; Global financial crisis;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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