Market-Induced Fiscal Discipline in Europe

Abstract

AbstractWe discuss and test market-induced fiscal discipline, with an emphasis on the conditions that determine its emergence. The analysis is based on the effect of the public-debt interest bill on key budget variables in the European Union over the 1995–2019 period. We focus on conditions regarding threshold effects, institutional characteristics and the government’s political orientation. We assess also whether fiscal discipline, which we detect on average, emerges constantly over the entire period. Overall, a positive robust effect from interest payments to the primary budget emerges, such an effect materializes mainly through expenditure containment and it results to depend significantly on some of the conditions tested.