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Do Sound Public Finances Require Fiscal Rules Or Is Market Pressure Enough?

Author(s): Michael Bergman, Michael M. Hutchison, Svend E. Hougaard Jensen

Do Sound Public Finances Require Fiscal Rules Or Is Market Pressure Enough? pdf(2 MB) Choose translations of the previous link 

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This paper discusses the balance between market pressure and fiscal rules in order to keep public finances on a sustainable path. We provide empirical evidence on market assessments of sovereign default risk to economic news, announcements of national austerity programs, EU programs designed to support government finances, and banking fragility emanating from several countries in the euro area affected by the European sovereign debt crisis. We find that, in general, the quality of market signals is an insufficient indicator alone to accurately guide the conduct of fiscal policy, particularly during the crisis period. Therefore, market signals should be used to complement fiscal rules rather than serving as a substitute.


(European Economy. Economic Papers 489. April 2013. Brussels. PDF. 62pp. Tab. Bibliogr. Free.)

KC-AI-13-489-EN-N (online)
ISBN 978-92-79-28571-4 (online)
doi: 10.2765/42955 (online)

JEL classification: E62, G12, G14, H60

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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