Does market discipline enter governments' fiscal reaction functions in the euro area?

Eric Meyermans

Quarterly Report on the Euro Area (QREA), 2019, vol. 18, issue 1, 7-21

Abstract: This section assesses the role that markets have played in disciplining governments’ behaviour across the euro area since the euro was launched. Discipline is measured by market interest rates, while governments’ behaviour is measured by adjustments in primary budget balances. Using real-time data derived from DG ECFIN’s forecast vintages released between 2002 and 2018 this section assesses the fiscal response of governments to changes in interest rates, conditioned by a variety of factors such asthe maturity composition of public debt and other country characteristics. The main finding is that bond markets exerted limited pressure on sovereign issuers in the run-up to the crisis. In contrast, during the crisis and afterwards Member States recorded a notable adjustment in their primary balances in response to interest rates soaring; this adjustment was more noticeable in those countries hardest hit by the crisis. The econometric analysis also suggests that the EU fiscal framework (e.g. national fiscal councils), the maturity structure of public debt and parliamentary elections have been significant factors affecting this responsiveness of fiscal policies.

Keywords: Euro area economy; market discipline; Bund spreads; fiscal rules; net public borrowing; wage inflation (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://economy-finance.ec.europa.eu/system/files/2019-07/ip111_chap_i_.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0181-01

Access Statistics for this article

More articles in Quarterly Report on the Euro Area (QREA) from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission Contact information at EDIRC.
Bibliographic data for series maintained by ECFIN INFO ().