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Recent events in international finance illustrate the close connection between the viability of a country's major private financial institutions and the sustainability of its sovereign debt. We explore the precise nature of this connection and the ways in which it shapes investors’ expectations of sovereign creditworthiness. We consider how investors use the overall level of information available about the private financial sector—and the potential risks it poses to government finances—when making decisions about investing in sovereign debt. We expect that governments providing more information about the private financial sector will have lower, and less volatile, borrowing costs. In order to test this argument, we create a new Financial Data Transparency (FDT) Index measuring governments’ willingness to release credible financial system data. Using the FDT and a sample of high-income OECD countries, we find that such transparency reduces sovereign borrowing costs. The effects are conditional on the level of public indebtedness. Transparent countries with low debt enjoy lower and less volatile borrowing costs.
Our paper focuses on the development of fiscal institutions in Central and East European countries from 1998 to 2007. Following the Europeanisation literature as well as the expectations that the European Union established in its dialogue with prospective members through annual “Preaccession Economic Programmes,” one would anticipate that there would have been reform of fiscal institutions in the run-up to EU accession. Unlike in most other policy fields, there is an additional incentive to continue reform once a country has joined the EU, which is eurozone membership. This paper explains how we measure fiscal institutions and fiscal reforms. We provide time series data on the fiscal institutions each country has had in place, and, based on a new set of surveys and interviews we conducted, we compare the state of these fiscal institutions in 2007, or after the countries had acceded to the EU, with the institutions in place before accession. We find that preparations for the EU accession prior to 2004 did lead to some changes in budget process in this set of countries. The carrot of EMU membership after acceding to the EU, however, has so far not had the same effect--the pace of reform has since stalled, with most countries leaving the same fiscal institutions in place.In some countries further reforms to develop medium-term fiscal frameworks are either planned or are in a process of being initiated but it is too early to say if the reforms will truly materialise and transform the frameworks into a vehicle that would impose a serious constraint for government spending.
We investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest rate spreads of Eurozone countries. Deficits significantly increase risk premia measured by relative swap spreads. The effect of deficits is significantly lower under EMU. This effect partly results from neglecting the role of fiscal institutions. After controlling for institutional changes, fiscal policy remains a significant determinant of risk premia in EMU. Better institutions are connected with lower risk premia. Furthermore deficits matter less for risk premia in countries with better institutions. Markets acknowledge that better institutions reduce fiscal difficulties rendering the monitoring of annual developments less important.
Fiscal Governance in Europe
(2009)
This book presents a theoretical framework to discuss how governments coordinate budgeting decisions. There are two modes of fiscal governance conducive to greater fiscal discipline, a mode of delegation and a mode of contracts. These modes contrast with a fiefdom form of governance, in which the decision-making process is decentralized. An important insight is that the effectiveness of a given form of fiscal governance depends crucially upon the underlying political system. Delegation functions well when there few, or no, ideological differences among government parties, whereas contracts are effective when there are many such differences. Based on original research, the book classifies European Union countries from 1985 to 2004. Empirically, delegation and contract states perform better than fiefdom states if they match the underlying political system. Additional chapters consider why countries have the fiscal institutions that they do, fiscal governance in Central and Eastern Europe, and the role of such institutions in the European Union.
This paper considers the effects of fiscal governance in Central and East European countries 1998-2008. The first part makes predictions about which form of fiscal governance fits which form of government. Under multi-party coalition governments, fiscal contracts where governments make political commitments to multi-annual fiscal plans work well. In countries where two political blocks face off against one another, delegation based around a strong finance ministry should be most effective.
The second part examines electoral and party systems, which affect the form of government in place. The third part documents norms, rules, and institutions in place. The final section considers the joint effects of fiscal governance on fiscal outcomes. On balance, the underlying political climate is crucial for determining what types of fiscal norms, institutions, and rules function best. The more countries diverge from their expected form of fiscal governance, the greater the increase in a country’s debt burden.