Resource title

Fiscal institutions, fiscal policy and sovereign risk premia

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Resource description

We investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest spreads contained in bond yields of the countries now belonging to the Eurozone. Deficits significantly increase risk premia measured by relative swap spreads. The effect of deficits is significantly lower under EMU. This effect partly results from neglecting the role of fiscal institutions. After controlling for institutional changes, fiscal policy remains a significant determinant of risk premia. We find that better institutions are connected with lower risk premia. Furthermore deficits and surpluses matter less for risk premia in countries with better institutions. This reflects the market perception, that better institutions will reduce fiscal dificulties and make the monitoring of annual developments less important. The results are robust to controlling for country fixed effects and different estimation methodologies.

Resource author

Mark Hallerberg, Guntram B. Wolff

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/19664

Resource license

Adapt according to the presented license agreement and reference the original author.