LAUSR

Abstract This paper contributes to the literature on fiscal policy as a determinant of government bond spreads. We analyze the effect of government spending on government bond spreads using a panel of 30 emerging countries during the period 2000–2013. Based on system-GMM estimations, we find that total public spending does not affect government bond spreads. Instead, we reveal a composition effect: higher current spending (public investment) increase (decrease) government bond spreads. This result may arise due to the fact that current (less productive) spending may be associated with lower growth prospects, making investors to require higher premia. Finally, we unveil nonlinearities driven by the quality of institutions: in particular, good institutions support a more favorable impact of current spending on government bond spreads. Our findings suggest that governments of emerging countries can improve their international financing conditions by reducing current spending and supporting public investment.