Does fiscal sentiment matter for sovereign risk?

Abstract

This study is the first to elaborate sentiment indicators related to the fiscal environment using information obtained from communiqués issued by official institutions, and the first to analyze the relationship between sovereign risk and fiscal sentiment. We create three measures of fiscal sentiment: the first is the general measure, consisting of information obtained from communiqués issued by the Central Bank of Brazil and the Ministry of Finance; the second consists of information obtained from communiqués issued by the Central Bank of Brazil only, and; the third measure consists of information obtained from communiqués issued by the Ministry of Finance only. The creation of these specific sentiment indicators is to verify whether sovereign risk measures respond differently to measures of sentiment related to the fiscal environment when information is extracted from communiqués issued by different official institutions. The results indicate that fiscal sentiment is able to affect sovereign risk. The findings also show that the fiscal sentiment obtained from information contained in the Brazilian Ministry of Finance’s communiqués has a greater impact on sovereign risk.