The political economy of fiscal rules and financial markets: when, why, and how does the market enforce rules?

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Fiscal rules (FRs) were swiftly employed during the greatrecession as a response to procyclical policy. The recentstand-off between the Italian government and the EuropeanCommission over FRs, however, raises serious concernsabout how they are enforced (Khan & Brunsden, 2018). Thisdevelopment is worrying as FRs have been a key post-crisisinstitutional response from international organisations suchas the IMF and European Commission (Frayne, Jaffee, & Riso,2013; Kumar et al., 2009). Recent experiences call intoquestion the validity of key assumptions about theenforceability of FRs, such as the market disciplinehypothesis (Bishop, Damrau, & Miller, 1989) which statesthat markets discipline sovereigns by increasing bond yields.Likewise, it is uncertain if non-democratic countries enjoy thesame benefit as democracies when adopting FRs, or if a7 / 12'democratic advantage' exists (Schultz & Weingast, 2003).My aim is to address a critical debate in the existingliterature about rule enforceability, which is couched in abroader debate about IMF conditionality (Mishkin, 2004;Rodrik, 2000). I will research FRs and financial markets acrossthree dimensions investigating: when and why FRs areadopted, when markets enforce rules, and if markets enforceFRs in non-democracies. The question about ruleenforceability will be addressed through a neoliberalinstitutionalist framework (Keohane, 1989) and will contributewith empirical work on the enforceability of institutions.