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

Fiscal rules (FRs) were swiftly employed during the great
recession as a response to procyclical policy. The recent
stand-off between the Italian government and the European
Commission over FRs, however, raises serious concerns
about how they are enforced (Khan & Brunsden, 2018). This
development is worrying as FRs have been a key post-crisis
institutional response from international organisations such
as the IMF and European Commission (Frayne, Jaffee, & Riso,
2013; Kumar et al., 2009). Recent experiences call into
question the validity of key assumptions about the
enforceability of FRs, such as the market discipline
hypothesis (Bishop, Damrau, & Miller, 1989) which states
that markets discipline sovereigns by increasing bond yields.
Likewise, it is uncertain if non-democratic countries enjoy the
same benefit as democracies when adopting FRs, or if a
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'democratic advantage' exists (Schultz & Weingast, 2003).
My aim is to address a critical debate in the existing
literature about rule enforceability, which is couched in a
broader debate about IMF conditionality (Mishkin, 2004;
Rodrik, 2000). I will research FRs and financial markets across
three dimensions investigating: when and why FRs are
adopted, when markets enforce rules, and if markets enforce
FRs in non-democracies. The question about rule
enforceability will be addressed through a neoliberal
institutionalist framework (Keohane, 1989) and will contribute
with empirical work on the enforceability of institutions.