The Rewards of Fiscal Consolidation: Sovereign Spreads and Confidence Effects
IMF Working Papers, July 2, 2019
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- The Rewards of Fiscal Consolidation: Sovereign Spreads and Confidence Effects
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Bibliographic details
- Authors: Antonio David, Jaime Guajardo, Juan Yepez
- Published: July 2, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498317054.001
Overview and Data
- Authors: Antonio David, Jaime Guajardo, Juan Yepez
- Date: July 2, 2019
- Sample: panel of 21 emerging market economies during 2000-18
- Dataset: novel dataset constructed using a global news database to identify precise announcement dates of fiscal consolidation actions
- Publication: IMF Working Papers, Working Paper No. 2019/141, Issue 141, Pages: 28
- DOI: https://doi.org/10.5089/9781498317054.001
- ISBN: 9781498317054
- ISSN: 1018-5941
Main Findings
- Sovereign spreads decline significantly following news that austerity measures have been approved by the legislature (congress or parliament).
- The decline in sovereign spreads is particularly pronounced:
- in periods of high sovereign spreads, and
- in countries under an IMF program.
- Consolidation announcements are less contractionary when sovereign spreads decline:
- the reduction in output is half of the counterfactual case in which spreads do not respond to announcements.
- Confidence effects, manifested as lower sovereign spreads, are identified as an important transmission channel of fiscal shocks.
- The role of confidence effects increases with the level of spreads:
- countries with high spread levels stand to benefit the most from putting in place credible austerity packages.
Methodology and Identification
- Identification strategy: precise dating of fiscal consolidation announcements using a global news database to capture the timing of legislature-approved austerity measures.
- Empirical focus: the short-run response of sovereign spreads and output to fiscal consolidation announcements across 21 emerging market economies between 2000 and 2018.
Policy Implications
- Credible, legislature-approved austerity packages can generate confidence effects through lower sovereign spreads.
- For countries with high sovereign spreads, credible fiscal consolidation may deliver larger benefits via spread compression and smaller output costs.
- Engagement with IMF-supported programs may amplify the spread-reducing effects of consolidation announcements.
Source: IMF Working Paper "The Rewards of Fiscal Consolidation: Sovereign Spreads and Confidence Effects", Antonio David, Jaime Guajardo, Juan Yepez, July 2, 2019.
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