Fiscal rules : budgetary and sovereign yield developments

Mestrado em Economia Monetária e FinanceiraNumerical fiscal rules appear in the literature as a solution for the bias of pro-cyclicality and as an alternative to discretionary measures conducted by policy makers. With this work we will try to understand if fiscal rules do, in fact, impact budget balances and sovereign yields, and afterwards perform a simulation exercise to assess what would have been the debt level if a numerical expenditure rule had been applied in 1990. The empirical analysis is based in a data panel of 27 EU countries covering the years between 1990 and 2011. We find that fiscal rules contribute to the reduction of budget balances, specifically expenditure rules significantly impact primary expenditure and that countries with rules applied experienced smaller sovereign bond yields. The simulations show that the same rule applied to different countries produces very different results, particularly due to the initial level of primary expenditure