Fiscal Policy Events and Interest Rate Swap Spreads: Evidence from the EU

Abstract

This paper assesses the importance given in capital markets to the credibility of the European fiscal framework. We evaluate to which extent relevant fiscal policy events taking place in 2002 produced a reaction in the long-term bond segment of the capital markets. Firstly, we identify the fiscal policy events and qualitatively assess the views of capital market participants. Secondly, we estimate the impact of these fiscal events on the interest rate swap spreads, which is our measure for risk premium. According to our results the reaction of swap spreads, when significant, have been mostly around five basis points or less.

Keywords: fiscal policy events, Stability and Growth Pact, interest rate swap spreads

JEL Classification: C22, G15, H30