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A quest between fiscal and market discipline

Economic Modelling, ISSN: 0264-9993, Vol: 119, Page: 106119
2023
  • 5
    Citations
  • 0
    Usage
  • 15
    Captures
  • 0
    Mentions
  • 45
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    5
    • Citation Indexes
      3
    • Policy Citations
      2
      • Policy Citation
        2
  • Captures
    15
  • Social Media
    45
    • Shares, Likes & Comments
      45
      • Facebook
        45

Article Description

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 that 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.

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