Can fiscal sovereignty be reconciled with fiscal discipline?

George Kopits ()
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George Kopits: Woodrow Wilson International Center for Scholars One Woodrow Wilson Plaza 1300 Pennsylvania Avenue NW 20004 Washington, D.C. USA

Acta Oeconomica, 2012, vol. 62, issue 2, 141-160

Abstract: Over the past two decades, international bond markets have become the chief disciplinarian of fiscal policy, displacing the International Monetary Fund and the European Union in this role. This trend culminated in the wake of the global financial crisis, as countries that had indulged in moral hazard and fiscal profligacy during the Great Moderation were vulnerable to a sharp rise in sovereign risk premium and in some cases to loss of market access. The article compares the response of new governments in Hungary and United Kingdom to restore policy credibility. A major lesson is that governments that adopt a rules-based fiscal framework, including fiscal watchdogs and transparency norms, are far more successful in anchoring fiscal expectations and in achieving fiscal sovereignty than those that do not.

Keywords: fiscal rules; sovereign risk; policy credibility; bond markets (search for similar items in EconPapers)
JEL-codes: E62 E65 F34 H61 H63 (search for similar items in EconPapers)
Date: 2012
Note: An earlier version was presented at the Banca d’Italia Workshop on “Rules and Institutions for Sound Fiscal Policy after the Crisis”, held in Perugia, March 31–April 2, 2011. The author is grateful to two anonymous referees and workshop participants for comments, and to Peter Virovácz for computational assistance.
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