The relevance of fiscal rules for fiscal and sovereign yield developments

Abstract

We assess whether numerical fiscal rules impact budget balances and sovereign yields. For a panel of 27 EU countries between 1990 and 2011, we find that fiscal rules reduce budget deficits, specifically expenditure rules, while countries with better fiscal rules experienced lower sovereign bond yields.

Keywords:

• fiscal rules
• budget balance
• yields

JEL Classification:

• C33
• E62
• G15
• H62

Notes

¹ Similar to Debrun et al. (2008), we use a dummy variable that represents governments which, by their nature – coalition governments –, have implemented commitment models, which easily allows for the implementation of fiscal rules. This variable was constructed based on Hallerberg et al. (2009).

Additional information

Funding

UECE is supported by the Fundação para a Ciência e a Tecnologia (The Portuguese Foundation for Science and Technology) through the PEst-OE/EGE/UI0436/2011 project.