IMF Working Papers

Trust What You Hear: Policy Communication, Expectations, and Fiscal Credibility

By Nicolas End, Gee Hee Hong

February 18, 2022

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Nicolas End, and Gee Hee Hong. Trust What You Hear: Policy Communication, Expectations, and Fiscal Credibility, (USA: International Monetary Fund, 2022) accessed November 8, 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

How do policy communications on future f iscal targets af fect market expectations and beliefs about the future conduct of f iscal policy? In this paper, we develop indicators of f iscal credibility that quantify the degree to which policy announcements anchor expectations, based on the deviation of private expectations f rom official targets, for 41 countries. We find that policy announcements partly re-anchor expectations and that f iscal rules and strong fiscal institutions, as well as a good policy track record, contribute to magnifying this effect, thereby improving fiscal credibility. Conversely, empirical analysis suggests that markets reward credibility with more favorable sovereign financing conditions.

Subject: Budget planning and preparation, Fiscal policy, Fiscal rules, Fiscal stance, Macro-fiscal analysis, Public financial management (PFM)

Keywords: Budget planning and preparation, Credibility indicator, Fiscal councils, Fiscal credibility, Fiscal institutions, Fiscal policy, Fiscal rules, Fiscal rules, Fiscal stance, Fiscal surprises, Forecast bias, Forecast errors, Global, Government announcement, Imprudent government, Macro-fiscal analysis, Market expectation, Policy track record, Private expectations

Publication Details

  • Pages:

    59

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2022/036

  • Stock No:

    WPIEA2022036

  • ISBN:

    9798400200748

  • ISSN:

    1018-5941

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