Sovereign bond market reactions to no-bailout clauses and fiscal rules – The Swiss experience

How can states benefit from the equity premium puzzle? Debt as revenue source for Swiss cantons

“…Regulations mandating disclosures are also part of the institutional conditions (Daldoss and Foraita, 2003). Previous studies have found significant negative effects debt brakes exercise on interest rates (Feld et al 2017). The debt brake index takes on higher values the more comprehensive the fiscal rule is, that is, when the following elements are considered: the connection between budget planning and execution, numerical constraints, and effective sanctions in the form of tax increases.…”

“…In 2003, the Swiss Supreme Court denied this obligation. To test the respective effects on the interest rate of the cantons, one variable capturing the municipalities' overall fiscal balance, a dummy variable that takes the value 1 after 2003, and the interaction of these two variables are included in the model (Feld et al 2017).…”

“…Later, the work of Manganelli and Wolswijk (2009) and Attinasi, Checherita, and Nickel (2011) offered an overview of the European area. Küttel and Kugler (2002) and Feld, Kalb, Moessinger, and Osterloh (2017) focused on Swiss cantons. In the many national and international studies addressing this question, the debt level has always served as an explanatory variable and, if it is significant, it usually affects the interest rate positively.…”

Fiscal Rules and Government Borrowing Costs: International Evidence

“…For the United States, this evidence includes Eichengreen and Bayoumi (1994) and Bayoumi, Goldstein, and Woglom (1995), who report that constitutional restraints to borrowing reduce the costs of borrowing by U.S. states; Poterba andRueben (1999a, 2001) who find that rules on U.S. states' expenditure, deficits, and debt reduce their borrowing costs except when a state also imposes limitations on the ability to raise taxes; Poterba and Rueben (2001) find that a sudden increase in the fiscal deficit raises state financing costs, but that the rise is smaller if the state has a strict fiscal rule; and Johnson and Kriz (2005) find that numerical fiscal rules reduce borrowing costs but that the effect operates indirectly by improving credit ratings. For European countries, the evidence includes Iara and Wolff (2014), who report that numerical rules only impact on borrowing costs of euro area countries at times of market stress; Heinemann, Osterloh, and Kalb (2014) who find that the impact of numerical rules on euro area countries is less important once historical fiscal preferences are considered; and Feld et al (2013) who find a robust negative effect of fiscal rules on bond spreads for Swiss cantons.…”

India: Selected Issues

“…The evidence largely relates to advanced economies, but serves to illustrate the importance of key elements that support market-based fiscal discipline among sub-national governments (SNGs). The empirical design of these studies is broadly similar to the one presented above, with direct relationships between SNG spreads and fiscal fundamentals (deficits and debt, Poterba and Reuben (2001)), Canada (Booth et al (2007)), Germany (Schuknecht et al (2009)), Australia (Sola and Palomba (2015)), and Switzerland (Feld et al (2017)). The broad findings are that SNGs with higher debt and deficits, typically face higher spreads.…”