Trust What You Hear: Policy Communication, Expectations, and Fiscal Credibility
IMF Working Papers, February 18, 2022
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Bibliographic details
- Authors: Nicolas End, Gee Hee Hong
- Published: February 18, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400200748.001
Overview and publication
- Title: Trust What You Hear: Policy Communication, Expectations, and Fiscal Credibility
- Authors: Nicolas End, Gee Hee Hong
- Date: February 18, 2022
- Series: Working Paper No. 2022/036
- Issue: 036
- Volume: 2022
- Pages: 59
- DOI: https://doi.org/10.5089/9798400200748.001
- ISBN: 9798400200748
- ISSN: 1018-5941
Research question and approach
- Core question: How do policy communications on future fiscal targets affect market expectations and beliefs about the future conduct of fiscal policy?
- Method: Development of indicators of fiscal credibility that quantify the degree to which policy announcements anchor expectations, based on the deviation of private expectations from official targets.
- Coverage: 41 countries
Key findings
- Policy announcements partly re-anchor expectations.
- Fiscal rules and strong fiscal institutions, as well as a good policy track record, contribute to magnifying the re-anchoring effect, thereby improving fiscal credibility.
- Empirical analysis suggests that markets reward credibility with more favorable sovereign financing conditions.
Subjects and keywords
- Subjects: 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 stance, fiscal surprises, forecast bias, forecast errors, Global, government announcement, imprudent government, Macro-fiscal analysis, market expectation, policy track record, private expectations
Practical implications and policy relevance
- Strengthening fiscal institutions and formal fiscal rules can increase the effectiveness of policy communications in anchoring private expectations.
- Maintaining a good policy track record complements institutional design to enhance fiscal credibility.
- Greater fiscal credibility is associated with more favorable sovereign financing conditions, implying potential financing benefits from improved communication and institutional reforms.
IMF Working Paper No. 2022/036 — Nicolas End and Gee Hee Hong
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