Fiscal tensions and risk premium

The main goal of the paper is to analyse one-dimensional, isolated impact of particular variables which are used in the literature as explanatory variables for risk premium following fiscal tensions. Using Student’s t-tests, supplemented with ANOVA analysis, we study about a hundred likely determinants of the risk premium in 22 OECD countries over 1978–2017. We find that for deeper falls in the risk premium following fiscal tensions, the size of fiscal adjustments matters more than their composition. That said, expenditure-based fiscal adjustments are more effective in lowering the risk premium than tax-based ones. Fiscal adjustments can outweigh the effects of global risk aversion. Otherwise its low level or decline is needed for deep falls in the risk premium, suggesting there are time-breaks in relations between the risk premium and other factors. Supply-side reforms, especially of the labour market, are of help. The risk premium often responds to their very announcements, indicating that fiscal tensions do not necessarily delay payoffs from reform efforts. That said, our results are only of qualitative nature and do not warrant any conclusions as to mechanisms or causality. SUPPLEMENTARY INFORMATION: The online version contains supplementary material available at 10.1007/s10663-022-09532-1.