Abstract

This chapter explores risks posed by fiscal policy shocks and sovereign yield spreads. We find that financial markets do indeed differentiate between revenue and spending-based fiscal policy consolidations. Revenue-based fiscal policy adjustments widen the sovereign yield spreads, while consumption spending-based adjustments narrow the yield spreads. In addition, the size and quality of public expenditure matters to investors. Evidence indicates that public investment increases the yield spreads. This means that the quality and efficiency of public investment matters. Hence the hypothesis that the composition of public spending matters for financial markets fits the South African data.

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