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Do Sound Public Finances Require Fiscal Rules Or Is Market Pressure Enough?

Author

Listed:
  • Michael Bergman
  • Michael M. Hutchison
  • Svend E. Hougaard Jensen

Abstract

This paper discusses the balance between market pressure and fiscal rules in order to keep public finances on a sustainable path. We provide empirical evidence on market assessments of sovereign default risk to economic news, announcements of national austerity programs, EU programs designed to support government finances, and banking fragility emanating from several countries in the euro area affected by the European sovereign debt crisis. We find that, in general, the quality of market signals is an insufficient indicator alone to accurately guide the conduct of fiscal policy, particularly during the crisis period. Therefore, market signals should be used to complement fiscal rules rather than serving as a substitute.

Suggested Citation

  • Michael Bergman & Michael M. Hutchison & Svend E. Hougaard Jensen, 2013. "Do Sound Public Finances Require Fiscal Rules Or Is Market Pressure Enough?," European Economy - Economic Papers 2008 - 2015 489, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0489
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    File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2013/ecp489_en.htm
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    Cited by:

    1. Ray, Nikhil. & Velasquez, Agustin. & Islam, Iyanatul., 2015. "Fiscal rules, growth and employment : a developing country perspective," ILO Working Papers 994881313402676, International Labour Organization.
    2. Bergman, U. Michael & Hutchison, Michael, 2015. "Economic stabilization in the post-crisis world: Are fiscal rules the answer?," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 82-101.
    3. repec:ilo:ilowps:488131 is not listed on IDEAS
    4. Dell' Erba, Salvatore & Mattina, Todd & Roitman, Agustin, 2015. "Pressure or prudence? Tales of market pressure and fiscal adjustment," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 196-213.
    5. Joshua Aizenman & Mahir Binici & Michael Hutchison, 2013. "Credit ratings and the pricing of sovereign debt during the euro crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 29(3), pages 582-609, AUTUMN.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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