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The relevance of fiscal rules for fiscal and yield developments

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  • António Afonso
  • Ana Sofia Guimarães

Abstract

Numerical fiscal rules mitigate the bias of pro-cyclicality, as an alternative to discretionary measures conducted by policy makers. We assess whether fiscal rules impact budget balances and sovereign yields, and we perform a simulation exercise to compute debt developments of EU countries, assuming that they had implemented a numerical expenditure rule in 1990. Our panel analysis covers 27 EU countries between 1990 and 2011. We find that fiscal rules contribute to the reduction of budget deficits, specifically expenditure rules, which significantly impact primary expenditure and conclude that countries with rules experienced lower sovereign bond yields. The simulations show that when the same rule is applied to different countries, it produces very different results, particularly on account of the initial level of primary expenditure.

Suggested Citation

  • António Afonso & Ana Sofia Guimarães, 2014. "The relevance of fiscal rules for fiscal and yield developments," Working Papers Department of Economics 2014/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    • Handle: RePEc:ise:isegwp:wp052014
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    References listed on IDEAS

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    Cited by:

    1. António Afonso & João Tovar Jalles, 2017. "The Price Relevance of Fiscal Developments," International Economic Journal, Taylor & Francis Journals, vol. 31(1), pages 36-50, January.
    2. Bergman, U. Michael & Hutchison, Michael M. & Jensen, Svend E. Hougaard, 2016. "Promoting sustainable public finances in the European Union: The role of fiscal rules and government efficiency," European Journal of Political Economy, Elsevier, vol. 44(C), pages 1-19.

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    More about this item

    Keywords

    numerical fiscal rules; expenditure rules; budget balance; sovereign yields.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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