Sovereign Risk Premia: The Link between Fiscal Rules and Stability Culture

34 Pages Posted: 16 Mar 2013

See all articles by Friedrich Heinemann

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Steffen Osterloh

German Council of Economic Experts

Alexander Kalb

ZEW – Leibniz Centre for European Economic Research

Date Written: March 1, 2013

Abstract

There is a growing empirical literature studying whether fiscal rules reduce borrowing costs. Nevertheless, it remains an open question whether these rules are effective genuinely or just because they mirror fiscal preferences of politicians and voters. In our analysis of European bond spreads, we shed light on this issue by employing several types of stability preference related proxies. These proxies refer to a country’s past stability performance, government characteristics and survey results related to general trust. We find evidence that these preference indicators have an influence on risk premia and dampen the measurable impact of fiscal rules. Yet, the interaction of stability preferences and rules points to a particular potential of fiscal rules in countries with a historically low stability culture.

Keywords: fiscal preferences, fiscal rules, debt crisis, bond markets

JEL Classification: H63, E62, G12

Suggested Citation

Heinemann, Friedrich and Osterloh, Steffen and Kalb, Alexander, Sovereign Risk Premia: The Link between Fiscal Rules and Stability Culture (March 1, 2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-016, Available at SSRN: https://ssrn.com/abstract=2233388 or http://dx.doi.org/10.2139/ssrn.2233388

Friedrich Heinemann (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Steffen Osterloh

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

Alexander Kalb

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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