There is a growing empirical literature studying whether fiscal rules reduce borrowing
costs. Nevertheless, it remains an open question whether these rules are effective genuinely or
just because they mirror fiscal preferences of politicians and voters. In our analysis of European
bond spreads, we shed light on this issue by employing several types of stability preference related
proxies. These proxies refer to a country’s past stability performance, government characteristics
and survey results related to general trust. We find evidence that these preference indicators
have an influence on risk premia and dampen the measurable impact of fiscal rules. Yet, the
interaction of stability preferences and rules points to a particular potential of fiscal rules in
countries with a historically low stability culture.
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