Trust What You Hear: Policy Communication, Expectations, and Fiscal Credibility by Nicolas End and Gee Hee Hong published by IMF (2/2022).
How do policy communications on future fiscal targets affect market expectations and beliefs about the future conduct of fiscal policy? In this paper, we develop indicators of fiscal credibility that quantify the degree to which policy announcements anchor expectations, based on the deviation of private expectations from official targets, for 41 countries. We find that policy announcements partly re-anchor expectations and that fiscal 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.
