The relevance of fiscal rules for fiscal and yield developments

Antonio Afonso and Ana Sofia Guimarães

No 2014/05, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: Numerical fiscal rules mitigate the bias of pro-cyclicality, as an alternative to discretionary measures conducted by policy makers. We assess whether fiscal rules impact budget balances and sovereign yields, and we perform a simulation exercise to compute debt developments of EU countries, assuming that they had implemented a numerical expenditure rule in 1990. Our panel analysis covers 27 EU countries between 1990 and 2011. We find that fiscal rules contribute to the reduction of budget deficits, specifically expenditure rules, which significantly impact primary expenditure and conclude that countries with rules experienced lower sovereign bond yields. The simulations show that when the same rule is applied to different countries, it produces very different results, particularly on account of the initial level of primary expenditure.

Keywords: numerical fiscal rules; expenditure rules; budget balance; sovereign yields. (search for similar items in EconPapers)
JEL-codes: C33 E62 G15 H62 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-cmp and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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