Fiscal Policy Events and Interest Rate Swap Spreads: Evidence from the EU

By António Afonso, Rolf R. Strauch. Social Science Research Network, 2007

121 citations recorded by the source corpus.

In this paper we assess the importance given in capital markets to the credibility of the European fiscal framework. We evaluate to which extent relevant fiscal policy events taking place in the course of 2002 produced a reaction in the long-term bond segment of the capital markets. Firstly, we identify the fiscal policy events and qualitatively assess the views of capital market participants. Secondly, we estimate the impact of these fiscal events on the interest rate swap spreads, which is our measure for the risk premium. According to our results the reaction of swap spreads, where it turned out to be significant, has been mostly around five basis points or less. JEL Classification: C22, G15, H30

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/2e82af0b4df7ab552d21b607bb7e32b58c532899

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Citations in the corpus

Fiscal institutions, fiscal policy and sovereign risk premia in EMU (2008, unknown): “In the European context, it is clear that markets pay some attention to what governments are doing (Afonso and Strauch 2007; Bernoth et al. 2004 and Heppke-Falk and Wolff 2008).”
Sovereign Credit Ratings and Financial Markets Linkages: Application to European Data (2012, unknown): “For instance, Afonso and Strauch (2007) evaluate to which extent policy events taking place in the course of 2002, when the Stability and Growth Pact was put to a test, impinged on sovereign spreads.”
Market Discipline, Financial Integration and Fiscal Rules: What Drives Spreads in the Euro Area Government Bond Market? (2007, unknown): “…rules, for instance by using interest rates rather than budgetary data for triggering non-compliance procedures or for determining the size of sanctions 5 Empirical evidence of non-compliance with fiscal rules and interest rate responses is mixed, as for instance shown by Afonso and Strauch (2004).”
Sovereign Spreads: Global Risk Aversion, Contagion or Fundamentals? (2010, unknown): “The paper by Afonso and Strauch (2004) find that specific policy events in 2002, when the Stability and Growth Pact came under close market scrutiny, had only temporary and limited impact on swap spreads.”
How Effective is Fiscal Policy Response in Systemic Banking Crises? (2009, result): “9 Afonso and Strauch (2004) have similar results using events analysis on a sample of EU countries.”
What Explains the Surge in Euro Area Sovereign Spreads during the Financial Crisis of 2007–09? (2009, background): “2004), a country’s credit rating (Manganelli and Wolswijk 2009), and in some cases dummies on fiscal announcements (Afonso and Strauch (2004). Our analysis looks at the role of a country’s fiscal position in determining its bond spreads vis-à-vis Germany, but also at whether the announcement of broa”
Yield spreads on EMU government bonds (2003, methodology): “7 The dating for all fiscal announcements in 2002 was kindly provided by Rolf Strauch and Antonio Afonso, who have recently produced a thorough event-study of all fiscal announcements in 2002 (Afonso and Strauch, 2003).”
Fiscal Policy and Financial Markets (2008, unknown): “1 Rare examples are Afonso and Strauch (2004), who investigate the impact of fiscal policy events on the interest rate swap spreads of long-term bonds in the European Union, using events study methodology; and Ardagna (2004), who examines the impact of episodes of large changes in fiscal stance on f”
The Determinants of Sovereign Bond Yield Spreads in the EMU (2012, background): “Similarly, Afonso and Strauch (2007) report that the fiscal policy events in 2002 in the EU had only small effects on government bond yield spreads, while Hallerberg and Wolff (2008) find that the effect of fiscal performance on EMU sovereign bond yields has weakened following the euro’s introductio”
The macroeconomic effects of fiscal policy (2012, unknown): “For Europe, the existing evidence points either to a significant (although small) effect (Bernoth et al., 2003; Codogno et al., 2003; Faini, 2006; Afonso and Strauch, 2007), or to the absence of impact (HeppkeFalk and Hufner, 2004).”
What Drives Spreads in the Euro Area Government Bond Market? (2007, unknown): “(1995) proposed increasing the role of market forces in fiscal rules, for instance by using interest rates rather than budgetary data for triggering non-compliance procedures or for determining the size of sanctions 5 Empirical evidence of non-compliance with fiscal rules and interest rate responses”
Sovereign Bond Market Reactions to Fiscal Rules and No-Bailout Clauses - The Swiss Experience (2013, unknown): “For instance, rather weak fiscal rules such as the Stability and Growth Pact in the EU, can hardly be expected to restore trust among the investors ex ante and to dampen risk premia (see Afonso and Strauch, 2007).”