Many economic studies analyse the impact of fiscal rules and discuss their effectiveness in limiting excessive debt. A majority of these studies, however, neglects or only deals insufficiently with the potential issue of endogeneity. In this paper, we propose a novel identification approach...

Based on probit estimates, this paper analyzes the effects of fiscal consolidation on the proba-bility of sovereign defaults in the short run. Using a panel of 104 developing countries from 1980 to 2009 and controlling for various economic, fiscal and political factors, we find that fiscal...

High public debt combined with low capacities of the state to raise taxes and to support markets can put even developed countries into turmoil. However, the existing political economy literature of state capacity, pioneered by Besley and Persson (2009), does not investigate the interaction of...

We investigate the political determinants of risk premiums which sub-national governments in Switzerland have to pay for their sovereign bond emissions. For this purpose we make use of financial market data from 288 tradable cantonal bonds in the period from 1981 to 2007. Our main focus is on...

There is a growing empirical literature studying whether fiscal rules reduce borrowing costs. Nevertheless, it remains an open question whether these rules are effective genuinely or just because they mirror fiscal preferences of politicians and voters. In our analysis of European bond spreads,...

The present paper analyzes expectations of German politicians about the German debt brake (Schuldenbremse), which became part of the German constitution in 2009. This fiscal rule requires the federal government and the German states to run a (cyclically adjusted) budget deficit of no more than...

Austerity measures are frequently enacted when the sustainability of public finances is in doubt. Such doubts are reflected in high sovereign yield spreads and put further strain on government finances. Is austerity successful in restoring market confidence, bringing about a reduction in yield...