Fiscal Consolidation under Market’s Scrutiny: How Government Communication Affects Bond Yields

Josef Sveda, Jaromir Baxa and Adam Gersl
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Josef Sveda: Institute of Economic Studies, Faculty of Social Sciences, Charles University & Czech National Bank, Prague, Czech Republic
Jaromir Baxa: Institute of Economic Studies, Faculty of Social Sciences, Charles University, & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czech Republic
Adam Gersl: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic

Czech Journal of Economics and Finance (Finance a uver), 2024, vol. 74, issue 2, 221-254

Abstract: We estimate short-run reactions of government bond spreads of selected EU countries to prime ministers' and finance ministers' public statements about fiscal policy from 2000 to 2019. Our dataset, which is based on the Factiva database, covers news that reached the markets via Reuters. Depending on their tone, we have classified them as hawkish (committing attitude towards austerity and prudent budget) or dovish (passive/reluctant attitude) and tested their impact on credit risk premia measured by government bond yields against risk-free rate (German Bund). Our results suggest that hawkish statements and signals by prime ministers decrease the credit risk premia, but this result masks a considerable time and country variation. The effect of hawkish fiscal communication is large and statistically significant, especially after the European Sovereign Debt Crisis acknowledging ECB’s interventions, but not before or during that crisis, suggesting limited power of communication to decrease a credit risk premium when markets are under stress or insensitive to underlying fundamentals.

Keywords: fiscal communication; bond spreads; EU debt crisis; fiscal consolidation (search for similar items in EconPapers)
JEL-codes: E62 G01 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:74:y:2024:i:2:p:221-254

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