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

By Federico Diaz Kalan, Adina Popescu, Julien Reynaud

April 13, 2018

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Federico Diaz Kalan, Adina Popescu, and Julien Reynaud. Thou Shalt Not Breach: The Impact on Sovereign Spreads of Noncomplying with the EU Fiscal Rules, (USA: International Monetary Fund, 2018) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Data processing, Economic and financial statistics, Financial crises, Fiscal policy, Fiscal rules, Fiscal stance

Keywords: Data processing, EDP coefficient, EDP dummy, EDP effect, EDP event, EDP framework, EDP procedure, EDP., Fiscal rules, Fiscal stance, Global, Noncompliance, Sovereign spreads, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/087
Stock No:

WPIEA2018087
ISBN:

9781484351024
ISSN:

1018-5941

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