TY - UNPB

T1 - Do Sound Public Finances Require Fiscal Rules Or Is Market Pressure Enough?

AU - Bergman, Ulf Michael

AU - Hutchison, Michael

AU - Jensen, Svend E. Hougaard

N1 - JEL codes: E62, F36, F44, G14, H63

PY - 2013

Y1 - 2013

N2 - This paper discusses the balance between market pressure and fiscal rules in order to keep public finances on a sustainable path. We provide empirical evidence on market assessments of sovereign default risk to economic news, announcements of national austerity programs, EU programs designed to support government finances, and banking fragility emanating from several countries in the euro area affected by the European sovereign debt crisis. We find that, in general, the quality of market signals is an insufficient indicator alone to accurately guide the conduct of fiscal policy, particularly during the crisis period. Therefore, market signals should be used to complement fiscal rules rather than serving as a substitute.

AB - This paper discusses the balance between market pressure and fiscal rules in order to keep public finances on a sustainable path. We provide empirical evidence on market assessments of sovereign default risk to economic news, announcements of national austerity programs, EU programs designed to support government finances, and banking fragility emanating from several countries in the euro area affected by the European sovereign debt crisis. We find that, in general, the quality of market signals is an insufficient indicator alone to accurately guide the conduct of fiscal policy, particularly during the crisis period. Therefore, market signals should be used to complement fiscal rules rather than serving as a substitute.

KW - Faculty of Social Sciences

KW - Euro area

KW - transmission of news

KW - financial markets

KW - fiscal rules

KW - sovereign debt

M3 - Working paper

SN - 9789279285714

T3 - Economic Papers

BT - Do Sound Public Finances Require Fiscal Rules Or Is Market Pressure Enough?

PB - The European Commission

ER -