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Do Fiscal Rules Lower Government Financing Costs?

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  • António Afonso
  • João Jalles

Abstract

We assess the effect of fiscal rules on sovereign bond yields over the short and medium-term, for 34 advanced countries and 21 emerging market economies, over the period 1980-2016. Our results, based on impulse response functios, show that the dynamic impact of fiscal rules on bond yields is negative and statistically significant, implyinglower government’s borrowing costs. This is a result stemming essetially from the advanced economies subsample. Moreover, in times of recession, a fiscal rule leads financial markets toreduce the risk premia on government bonds. Finally, when it comes to design features of fiscalrules, independent monitoring of compliance to the rule also reduces sovereign yields.

Suggested Citation

  • António Afonso & João Jalles, 2017. "Do Fiscal Rules Lower Government Financing Costs?," Working Papers REM 2017/15, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp0152017
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    More about this item

    Keywords

    fiscal rules; sovereign yields; financing costs; impulse response functions; local projection;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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