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Trust What You Hear: Policy Communication, Expectations, and Fiscal Credibility
Author:
Mr. Nicolas End
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Mr. Gee Hee Hong null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 036
Language:
English
Publication Date:
18 Feb 2022
DOI:
https://doi.org/10.5089/9798400200748.001
ISBN:
9798400200748
ISSN:
1018-5941
Pages:
59
Keywords:
Fiscal credibility; fiscal policy; forecast errors; private expectations; fiscal institutions; fiscal rules; fiscal councils; fiscal surprises; market expectation; credibility indicator; policy track record; government announcement; forecast bias; imprudent government; Fiscal rules; Budget planning and preparation; Fiscal stance; Macro-fiscal analysis; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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How do policy communications on future f iscal targets af fect market expectations and beliefs about the future conduct of f iscal policy? In this paper, we develop indicators of f iscal credibility that quantify the degree to which policy announcements anchor expectations, based on the deviation of private expectations f rom official targets, for 41 countries. We find that policy announcements partly re-anchor expectations and that f iscal rules and strong fiscal institutions, as well as a good policy track record, contribute to magnifying this effect, thereby improving fiscal credibility. Conversely, empirical analysis suggests that markets reward credibility with more favorable sovereign financing conditions.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund