CEU Electronic Theses and Dissertations, 2018
| Author | Dos Santos Gomes, Mario Luis |
|---|---|
| Title | Containing Bond Spreads: Do Fiscal Rules Matter in Emerging Markets? |
| Summary | In the last 20 years, an increasing number of emerging countries have adopted numerical fiscal rules, as a way to promote fiscal discipline and build credibility with the market. Nevertheless, while the empirical literature on how fiscal rules can help countries achieve better fiscal outcomes has grown in the period, it remains an open question if the market actually does take in consideration the existence and stringency of fiscal rules when defining the risk premium of emerging economies. In this study, we argue that, due to the nature of fiscal rules, they are not an indicator internalized by investors when assessing a country’s default risk. Counting with a unique index to measure Fiscal Rules Strength across 14 emerging economies, we investigate what part does the strength of fiscal rules play in defining sovereign bond spreads. Using panel data from 1998 to 2014, we were able to confirm that strengthening fiscal rules has no direct effect on spreads. However, we also uncovered that stronger fiscal rules make a small difference when a country faces changes in other fundamentals. First, they can have a dampening effect on how much spreads increase in times of deteriorating debt. Second, they can increment the negative effect that accumulating Reserves has on spreads. Both effects are small, but statistically significant. |
| Supervisor | Horvath, Julius |
| Department | Economics MA |
| Full text | https://www.etd.ceu.edu/2018/gomes_mario.pdf |
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