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Fiscal institutions, fiscal policy and sovereign risk premia

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  • Hallerberg, Mark
  • Wolff, Guntram B.

Abstract

We investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest spreads contained in bond yields of the countries now belonging to the Eurozone. Deficits significantly increase risk premia measured by relative swap spreads. The effect of deficits is significantly lower under EMU. This effect partly results from neglecting the role of fiscal institutions. After controlling for institutional changes, fiscal policy remains a significant determinant of risk premia. We find that better institutions are connected with lower risk premia. Furthermore deficits and surpluses matter less for risk premia in countries with better institutions. This reflects the market perception, that better institutions will reduce fiscal dificulties and make the monitoring of annual developments less important. The results are robust to controlling for country fixed effects and different estimation methodologies.

Suggested Citation

  • Hallerberg, Mark & Wolff, Guntram B., 2006. "Fiscal institutions, fiscal policy and sovereign risk premia," Discussion Paper Series 1: Economic Studies 2006,35, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:5099
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    More about this item

    Keywords

    Budget institutions; fiscal rules; sovereign risk premia; EMU; fiscal policy; government bond yields;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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