Work

Fiscal Rules, Independent Fiscal Institutions and Sovereign Risk: Evidence From the European Union

Year: 2025

Type: article

Abstract: ABSTRACT This paper examines the effects of fiscal rules (FRs) and independent fiscal institutions (IFIs) on sovereign risk. To address potential endogeneity issues, we employ the System Generalised Method of Moments (GMM) estimator in an analysis comprising 24 European Union member states throughout the 2007–2019 period. Our results indicate that FRs are effective in mitigating sovereign default risk, as measured by credit default swap (CDS) spreads on sovereign bonds. In addition, we document that Member States with better numerical compliance rates with European Union fiscal rules have lower sovereign CDS spreads and thus lower risk. By overseeing and fostering compliance with numerical fiscal targets and enhancing the transparency of the budgetary process, IFIs exert a beneficial impact on the probability of sovereign default, particularly those subject to institutional reforms. Furthermore, more developed financial markets supported by both FRs and IFIs contribute to a reduction in sovereign CDS premiums. Our findings have critical policy implications against the backdrop of European economic and fiscal governance reform.

Source: International Journal of Finance & Economics

DOI: 10.1002/ijfe.3127

Authors: Bogdan Căpraru, George Georgescu, Nicu Sprincean

Institutions: Alexandru Ioan Cuza University, Romanian Academy

Language: English

Topic: Fiscal Policies and Political Economy

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: hybrid

Estimated APC paid: $3,400