Abstract
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.
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.
| Original language | English |
|---|---|
| Publisher | The European Commission |
| Number of pages | 58 |
| ISBN (Print) | 9789279285714 |
| Publication status | Published - 2013 |
| Series | Economic Papers |
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| Number | 489 |
Keywords
- Faculty of Social Sciences
- Euro area
- transmission of news
- financial markets
- fiscal rules
- sovereign debt