A quest between fiscal and market discipline
Fiscal rules are typically seen as government constraints. Yet, the extent to which they are substituted or complemented by market discipline (especially, during financial stress) remains unexplored. Using data for 71 countries over the period 1985–2015, we estimate an “augmented” fiscal reaction function to assess the impact of both fiscal and market discipline. We find that different market signals influence fiscal policy, but fiscal discipline depends on market incentives. In the EU and the OECD, market signals complement fiscal rules. These are less effective in the EMU and non-OECD countries are “debt intolerant”. Yet, there are unintended consequences: (i) neither output and debt stabilisation, nor fiscal rules affect the fiscal stance in the absence of financial crises; and (ii) financial stress makes fiscal discipline a destabilising factor, while central bank actions almost dismiss it. Finally, market (fiscal) discipline effects are (not) persistent and stronger (more uncertain) for the EMU.
Funding
National Funds of the FCT – Portuguese Foundation for Science and Technology within the project “UID/ECO/03182/2020”
History
School
- Business and Economics
Department
- Economics
Published in
Economic ModellingVolume
119Publisher
ElsevierVersion
- AM (Accepted Manuscript)
Rights holder
© ElsevierPublisher statement
This paper was accepted for publication in the journal Economic Modelling and the definitive published version is available at https://doi.org/10.1016/j.econmod.2022.106119Acceptance date
2022-11-21Publication date
2022-11-26Copyright date
2022ISSN
0264-9993Publisher version
Language
- en