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Sovereign risk premia: The link between fiscal rules and stability culture

Listed author(s):
  • Heinemann, Friedrich
  • Osterloh, Steffen
  • Kalb, Alexander

There is a growing empirical literature studying whether fiscal rules reduce borrowing costs. Nevertheless, it remains an open question whether these rules are effective genuinely or just because they mirror fiscal preferences of politicians and voters. In our analysis of European bond spreads, we shed light on this issue by employing several types of stability preference related proxies. These proxies refer to a country's past stability performance, government characteristics and survey results related to general trust. We find evidence that these preference indicators have an influence on risk premia and dampen the measurable impact of fiscal rules. Yet, the interaction of stability preferences and rules points to a particular potential of fiscal rules in countries with a historically low stability culture.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 13-016.

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Date of creation: 2013
Handle: RePEc:zbw:zewdip:13016
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