OR

• With a unique data set summarising the quality of rules-based fiscal governance in European Union member states, we show that stronger fiscal rules in euro-area members reduce sovereign risk premia, in particular in times of market stress. • To do so, we develop a model of sovereign spreads that are determined by fiscal institutions in interaction with the level of risk aversion. Estimation of the model confirms the central predictions. The legal basis for the rules, and mechanisms for enforcing them, are the most important dimensions of rules-based fiscal governance