Rules and risk in the euro area: does rules-based national fiscal governance contain sovereign bond spreads?

Anna Iara and Guntram Wolff

No 433, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: The strengthening of national fiscal frameworks, including numerical fiscal rules, has recently been proposed as an important part of the economic governance reform package for the EU. The strength of numerical fiscal rules can be described along the dimensions of their statutory base, the room to revise budgetary objectives, provisions for their monitoring and enforcement, and their media visibility. With a unique data set summarizing the quality of national fiscal rules along these dimensions, we show that stronger fiscal rules in euro area member states reduce sovereign risk. According to our estimates, yield spreads against Germany of countries with relatively weak fiscal rules could be up to 100 basis points lower if they upgraded their numerical fiscal rules. The legal base turns out to be the most important dimension for the perceived effectiveness of the rules. The effectiveness of the correction and enforcement mechanisms turns out to be very important as well, while the role of the bodies in charge of monitoring and enforcing compliance is somewhat smaller. Overall, national fiscal rules are found to be beneficial for market assessments of governments' ability and willingness to timely service debt: they could thus provide an effective way to implement fiscal discipline.

JEL-codes: E43 E62 G12 H60 H63 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2010-12
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0433

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