Trust What You Hear: Policy Communication, Expectations, and Fiscal Credibility

Nicolas End and Gee Hee Hong

No 2022/036, IMF Working Papers from International Monetary Fund

Abstract: How do policy communications on future f iscal targets af fect market expectations and beliefs about the future conduct of f iscal policy? In this paper, we develop indicators of f iscal credibility that quantify the degree to which policy announcements anchor expectations, based on the deviation of private expectations f rom official targets, for 41 countries. We find that policy announcements partly re-anchor expectations and that f iscal rules and strong fiscal institutions, as well as a good policy track record, contribute to magnifying this effect, thereby improving fiscal credibility. Conversely, empirical analysis suggests that markets reward credibility with more favorable sovereign financing conditions.

Keywords: Fiscal credibility; fiscal policy; forecast errors; private expectations; fiscal institutions; fiscal rules; fiscal councils; fiscal surprises; market expectation; credibility indicator; policy track record; government announcement; forecast bias; imprudent government; Fiscal rules; Budget planning and preparation; Fiscal stance; Macro-fiscal analysis; Global (search for similar items in EconPapers)
Pages: 59
Date: 2022-02-18
New Economics Papers: this item is included in nep-mac
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