Cost of borrowing shocks and fiscal adjustment
Cost of borrowing shocks and fiscal adjustment
Do capital markets impose fiscal discipline? To answer this question, we estimate the fiscal response to a change in the interest rate paid by 14 European governments over four decades in a panel VAR, using sign restrictions to identify structural shocks. A jump in the cost of borrowing leads to an improvement in the primary balance although insufficient to prevent a rise in the debt-to-GDP ratio. Adjustment mainly takes place via rising revenues rather than falling primary expenditures. For EMU countries, the primary balance response was stronger after 1992, when the Maastricht Treaty was signed, suggesting an important interaction between market discipline and fiscal rules.
23-48
de Groot, O.
0be49c71-aa34-43d6-80b7-89426334ecfc
Holm-Hadulla, F.
0092a310-f682-48f5-8ef9-77337aae9155
Leiner-Killinger, N.
79176a63-3dad-4c4f-a76a-b8ab915f9dd7
28 October 2015
de Groot, O.
0be49c71-aa34-43d6-80b7-89426334ecfc
Holm-Hadulla, F.
0092a310-f682-48f5-8ef9-77337aae9155
Leiner-Killinger, N.
79176a63-3dad-4c4f-a76a-b8ab915f9dd7
de Groot, O., Holm-Hadulla, F. and Leiner-Killinger, N.
(2015)
Cost of borrowing shocks and fiscal adjustment.
Journal of International Money and Finance, 59, .
(doi:10.1016/j.jimonfin.2015.09.005).
Abstract
Do capital markets impose fiscal discipline? To answer this question, we estimate the fiscal response to a change in the interest rate paid by 14 European governments over four decades in a panel VAR, using sign restrictions to identify structural shocks. A jump in the cost of borrowing leads to an improvement in the primary balance although insufficient to prevent a rise in the debt-to-GDP ratio. Adjustment mainly takes place via rising revenues rather than falling primary expenditures. For EMU countries, the primary balance response was stronger after 1992, when the Maastricht Treaty was signed, suggesting an important interaction between market discipline and fiscal rules.
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e-pub ahead of print date: 14 September 2015
Published date: 28 October 2015
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Local EPrints ID: 503791
URI: http://eprints.soton.ac.uk/id/eprint/503791
ISSN: 0261-5606
PURE UUID: f8754c50-14c8-4e61-a60f-3051433cc6d5
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Date deposited: 13 Aug 2025 16:38
Last modified: 22 Aug 2025 02:49
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Author:
O. de Groot
Author:
F. Holm-Hadulla
Author:
N. Leiner-Killinger
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