Sage Journals: Discover world-class research

Abstract

During the euro crisis policy-makers tried to re-establish credibility with austere budgets. Studies of austerity have been plagued by measurement and endogeneity problems. We provide a direct test of the effect of austerity on confidence by calculating the immediate impact of austere budgets on government bonds. We build a unique database of budget dates and conduct event studies of 223 (future) Eurozone budgets. Since austere budgets are enacted in particular circumstances, we use a treatment effects design to measure markets’ responses. Our findings are discouraging for the argument that austerity can provide a positive credibility shock. Markets do not welcome austerity. On the contrary, austere budgets are associated with substantial interest rate increases. These results underline how constrained governments are in debt crises.

Keywords

Austerity budgets comparative political economy debt Eurozone

Get full access to this article

View all access options for this article.

References

Ağca Ş and Igan D (2013) Fiscal consolidation and the cost of credit: Evidence from syndicated loans. IMF Working Paper WP/13/36. Available at: https://www.imf.org/external/pubs/cat/longres.aspx?sk=40292.0 (accessed 1 September 2014).

Alesina

(1987) Macroeconomic policy in a two-party system as a repeated game. Quarterly Journal of Economics 102: 651–678.

Alesina

(2012) Fiscal policy after the great recession. Atlantic Economic Journal 40: 429–435.

Alesina A and Ardagna S (2012) The design of fiscal adjustments. NBER Working Paper No. 18423. Available at: http://www.nber.org/papers/w18423 (accessed 1 September 2014).

Alt J, Lassen D and Wehner J (2014) It isn’t just about Greece: Domestic politics, transparency and fiscal gimmickry in Europe. British Journal of Political Science 44(4): 707–716.

Ardagna

(2004) Fiscal stabilizations: When do they work and why. European Economic Review 48: 1047–1074.

Barry S (2010) Some Christmas cheer for the government as post-budget market reaction results in lower Irish bond spreads. Dublin, Ulster Bank, Group Economics. Available at: http://www.ulsterbankcapitalmarkets.com/EconomicIndicators.aspx?gid=RI&ind=22 (accessed 1 September 2014).

Bechtel

Schneider

(2010) Eliciting substance from hot air: Financial market responses to EU summit decisions on European defense. International Organization 64: 199–223.

Bernhard

Leblang

(2006) Democratic Processes and Financial Markets: Pricing Politics, Cambridge: Cambridge University Press.

10.

Blyth M (2013) Austerity: The History of a Dangerous Idea. Oxford: Oxford University Press.

11.

Breen

McMenamin

(2013) Political institutions, credible commitment, and sovereign debt in advanced economies. International Studies Quarterly 57: 842–854.

12.

Budge

Klingemann

Volkens

(2001) Mapping Policy Preferences. Estimates for Parties, Electors, and Governments: 1945–1998, Oxford: Oxford University Press.

13.

Campbell

Mackinlay

(1997) The Econometrics of Financial Markets, Princeton: Princeton University Press.

14.

Corrado

(2011) Event studies: A methodological review. Accounting and Finance 51: 207–234.

15.

De Bondt

Thaler

(1985) Does the stock market overreact? Journal of Finance 40: 793–805.

16.

Demir

Danis

(2011) The effect of performance of soccer clubs on their stock prices: Evidence from Turkey. Emerging Markets Finance and Trade 47: 58–70.

17.

Devries P, Guajaro J, Leigh D, et al. (2011) A new action-based dataset of fiscal consolidation. IMF Working Paper WP/11/128. Available at: http://www.imf.org/external/pubs/ft/wp/2011/wp11128.pdf (accessed 1 September 2014).

18.

Drazen

(2000) Political Economy in Macroeconomics, Princeton, NJ: Princeton University Press.

19.

Drazen

Masson

(1994) Credibility of policies versus credibility of policymakers. Quarterly Journal of Economics 100: 735–754.

20.

Elgie

McMenamin

(2008) Political fragmentation, fiscal deficits and political institutionalization. Public Choice 136: 255–267.

21.

Fama

(1970) Efficient capital markets: A review and synthesis. The Journal of Finance 25: 383–417.

22.

Geranio

Zanotti

(2010) Equity markets do not fit all: An analysis of public-to-private deals in continental Europe. European Financial Management 18: 867–895.

23.

Gilligan

Krehbiel

(1988) Complex rules and congressional outcomes: An event study of energy tax legislation. Journal of Politics 50: 625–654.

24.

Goldbach

Fahrholz

(2011) The euro area’s common default risk: Evidence on the Commission’s impact on European fiscal affairs. European Union Politics 12: 507–528.

25.

Greene

(2012) Econometric Analysis, Upper Saddle River, NJ: Prentice Hall.

26.

Hallerberg

Strauch

von Hagen

(2009) Fiscal Governance in Europe, Cambridge: Cambridge University Press.

27.

Henisz

(2004) Political institutions and policy volatility. Economics and Politics 16: 1–27.

28.

Herndon T, Ash M and Pollin R (2013) Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Amherst, MA: Political Economy Research Institute, University of Massachusetts Amherst Working Paper No. 322. Available at: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf (accessed 1 September 2014).

29.

Hibbs

(1977) Political parties and macroeconomic policy. American Political Science Review 71: 1467–1487.

30.

Hibbs

(1994) The partisan model of macroeconomic cycles: More theory and evidence for the United States. Economics and Politics 6: 1–24.

31.

House J and Román D (2012) Spain unveils new set of overhauls. Wall Street Journal. Available at: http://online.wsj.com/news/articles/SB10000872396390443916104578021692765950384 (accessed 1 September 2014).

32.

Irish Examiner (2010) Europe rejects Cabinet growth forecast. The Irish Examiner, 30 November.

33.

Jayachandran

(2006) The Jeffords effect. Journal of Law and Economics 49: 397–425.

34.

Jordà Ò and Taylor A (2013) The time for austerity: Estimating the average treatment effect of fiscal policy. NBER Working Paper No. 19414. Available at: http://www.frbsf.org/economic-research/files/wp2013-25.pdf (accessed 1 September 2014).

35.

Keefer

Stasavage

(2003) The limits of delegation: Veto players, central bank independence, and the credibility of monetary policy. American Political Science Review 97: 407–423.

36.

Kim

H-M

Fording

(2001) Extending party estimates to governments and electors. In: Klingemann

H-D

Budge

Volkens

(eds) Mapping Policy Preferences: Estimates for Parties, Electors, and Governments 1945–1998, Oxford: Oxford University Press, pp. 157–178.

37.

Kolari

Pynnönen

(2010) Event study testing with cross-sectional correlation of abnormal returns. The Review of Financial Studies 23: 3996–4025.

38.

Krugman P (2010) Myths of Austerity. The New York Times, 1 July. Available at: http://www.nytimes.com/2010/07/02/opinion/02krugman.html?_r=0 (accessed 1 September 2014).

39.

Krugman P (2013) The excel depression. The New York Times, 18 April. Available at: http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.html (accessed 1 September 2014).

40.

Kuttner

Posen

(2010) Do markets care who chairs the Central Bank? Journal of Money Credit and Banking 42: 347–371.

41.

Kydland

Prescott

(1977) Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy 85: 473–490.

42.

Lewis

Linzer

(2005) Estimating regression models in which the dependent variable is based on estimates. Political Analysis 13: 345–364.

43.

Mosley L (2003) Global Capital and National Governments. Cambridge: Cambridge University Press.

44.

Mosley

(2004) Government-financial market relations after EMU. New currency, new constraints? European Union Politics 5: 181–209.

45.

Phillips

(2014) Reform and Volatility: The Political Sources of Financial Market Volatility in Brazil and Mexico, 1991–2002, London: London School of Economics and Political Science.

46.

Reinhart C, Reinhart V and Rogoff K (2012) Debt overhangs: Past and present. NBER Working Paper No. 18015. Available at: http://www.nber.org/papers/w18015 (accessed 1 September 2014).

47.

Reinhart

Rogoff

(2010) Growth in a time of debt. American Economic Review: Papers and Proceedings 100: 573–578.

48.

Roberts

(1990) Political institutions, policy expectations, and the 1980 election: A financial market perspective. American Journal of Political Science 34: 289–310.

49.

Rogoff

Sibert

(1988) Elections and macroeconomic policy cycles. Review of Economic Studies 55: 1–16.

50.

Romer

(2010) The macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks. American Economic Review 100: 763–801.

51.

Sandler DH and Sandler R (2012) Multiple event studies in public finance: A simulation study with applications. Department of Economics, University of California, Davis. May 24. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2341638 (accessed 1 September 2014).

52.

Sargent T and Wallace N (1981) Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Review Fall: 1–19.

53.

Sattler

(2013) Do markets punish left governments? Journal of Politics 75: 343–356.

54.

Smeets

Zimmermann

(2013) Did the EU summits succeed in convincing the markets during the recent crisis? Journal of Common Market Studies 51: 1158–1177.

55.

Stuckler D and Basu S (2013) How austerity kills. The New York Times, 12 May. Available at: http://www.nytimes.com/2013/05/13/opinion/how-austerity-kills.html?pagewanted=all (accessed 1 September 2014).

56.

The Telegraph (2010) Budget 2010: Financial markets react. Available at: http://www.telegraph.co.uk/finance/budget/7846544/Budget-2010-financial-markets-react.html (accessed 1 September 2014).

57.

Tufte

(1978) Political Control of the Economy, Princeton, NJ: Princeton University Press.

58.

Wolf M (2012) Look beyond summits for salvation. Financial Times, 27 June. Available at: http://www.ft.com/intl/cms/s/0/98dc710e-beb9-11e1-8ccd-00144feabdc0.html#axzz3C4wD6UJ5. (accessed 1 September 2014).

59.

Wooldridge

(2010) Econometric Analysis of Cross-Sectional and Panel Data, 2nd ed. Cambridge, MA: Massachusetts Institute of Technology Press.

Supplementary Material

Please find the following supplemental material available below.

For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.

For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.

0.16 MB

0.00 MB

0.38 MB