Thou Shalt Not Breach: The Impact on Sovereign Spreads of Noncomplying with the EU Fiscal Rules

37 Pages Posted: 22 May 2018

See all articles by Federico Kalan

Federico Kalan

International Monetary Fund (IMF)

Adina Popescu

International Monetary Fund (IMF)

Julien P. M. Reynaud

International Monetary Fund (IMF)

Date Written: April 2018

Abstract

There is evidence that fiscal rules, in particular well-designed rules, are associated with lower sovereign spreads. However, the impact of noncompliance with fiscal rules on spreads has not been examined in the literature. This paper estimates the effect of the Excessive Deficit Procedure (EDP) on sovereign spreads of European Union member states. Based on a sample including the 28 European Union countries over the period 1999 to 2016, sovereign spreads of countries placed under an EDP are found to be on average higher compared to countries that are not under an EDP. The interpretation of this result is not straight-forward as different channels may be at play, in particular those related with the credibility and the design of the EU fiscal framework. The specification accounts for typical macroeconomic, fiscal, and financial determinants of sovereign spreads, the System Generalized Method of Moments estimator is used to control for endogeneity, and results are robust to a range of checks on variables and estimators.

Keywords: Fiscal rules, Fiscal policy, noncompliance, sovereign spreads, General, Models with Panel Data

JEL Classification: E62, H60, C23

Suggested Citation

DK, Fede and Popescu, Adina and Reynaud, Julien P. M., Thou Shalt Not Breach: The Impact on Sovereign Spreads of Noncomplying with the EU Fiscal Rules (April 2018). IMF Working Paper No. 18/87, Available at SSRN: https://ssrn.com/abstract=3182514

Fede DK (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Adina Popescu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Julien P. M. Reynaud

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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