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Rules and risks in the euro area. Bruegel Working Paper 2011/10, 4 October 2011

Wolff, Guntram B. and Iara, Anna (2011) Rules and risks in the euro area. Bruegel Working Paper 2011/10, 4 October 2011. [Working Paper]

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    Abstract

    Anna Iara and Guntram Wolff develop a model of sovereign spreads that are determined by the probability of default in interaction with the level of risk aversion. Estimation of the model confirms the central predictions. The legal basis for the rules, and mechanisms for enforcing them, are the most important dimensions of rules based fiscal governance. Highlights: With a unique data set summarising the quality of rules-based fiscal governance in European Union member states, we show that stronger fiscal rules in euro-area members reduce sovereign risk premia, in particular in times of market stress. • To do so, we develop a model of sovereign spreads that are determined by the probability of default in interaction with the level of risk aversion. Estimation of the model confirms the central predictions. The legal basis for the rules, and mechanisms for enforcing them, are the most important dimensions of rules based fiscal governance.

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    Item Type: Working Paper
    Uncontrolled Keywords: Fiscal governance; numerical fiscal rules; sovereign spreads; sovereign risk; euro area.
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 07 Oct 2011 12:47
    Number of Pages: 29
    Last Modified: 07 Oct 2011 12:47
    URI: http://aei.pitt.edu/id/eprint/32552

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