The relevance of fiscal rules for fiscal and yield developments

• Author(s): Afonso, António ; Guimarães, Ana Sofia
• Date: 2014
• Persistent ID: http://hdl.handle.net/10400.5/6521
• Origin: Repositório da UTL
• Subject(s): Numerical fiscal rules; Expenditure rules; Budget balance; Sovereign yields
• Document Type: Other
• Language: English

Description

Numerical fiscal rules mitigate the bias of pro-cyclicality, as an alternative to discretionary measures conducted by policy makers. We assess whether fiscal rules impact budget balances and sovereign yields, and we perform a simulation exercise to compute debt developments of EU countries, assuming that they had implemented a numerical expenditure rule in 1990. Our panel analysis covers 27 EU countries between 1990 and 2011. We find that fiscal rules contribute to the reduction of budget deficits, specifically expenditure rules, which significantly impact primary expenditure and conclude that countries with rules experienced lower sovereign bond yields. The simulations show that when the same rule is applied to different countries, it produces very different results, particularly on account of the initial level of primary expenditure.