Author: Mr.David Hauner Publisher: International Monetary Fund ISBN: 1451865651 Category : Business & Economics Languages : en Pages : 31
Book Description
References to policy credibility, particularly with regard to fiscal policy, are ubiquitous in both economic literature and financial markets, even though it is not directly observable. The case of the EU new member states (NMS)-emerging markets joining a supranational entity that is generally considered to have higher policy credibility-provides a unique experiment to assess the effects of credibility on sovereign credit. This paper examines the impact of EU accession on three key variables that can reflect in varying degrees policy credibility: sovereign ratings, foreign currency spreads, and local currency yields. The results suggest that the NMS appear to have enjoyed higher credibility compared to their peers.
Author: Tim Willems Publisher: International Monetary Fund ISBN: Category : Business & Economics Languages : en Pages : 28
Book Description
This article surveys the literature on sovereign debt sustainability from its origins in the mid-1980s to the present, focusing on four debates. First, the shift from an “accounting based” view of debt sustainability, evaluated using government borrowing rates, to a “model based” view which uses stochastic discount rates. Second, empirical tests focusing on the relationship between primary balances to debt. Third, debt sustainability in the presence of rollover risk. And fourth, whether government borrowing costs below rates of growth (“r
Author: Mr.Giovanni Dell'Ariccia Publisher: International Monetary Fund ISBN: 1484359623 Category : Business & Economics Languages : en Pages : 54
Book Description
This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
Author: Wenxin Du Publisher: ISBN: Category : Debts, Public Languages : en Pages : 52
Book Description
Abstract: Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more countercyclical inflation, where nominal debt provides better consumption-smoothing, issue more foreign-currency debt. We propose that monetary policy credibility explains the currency composition of sovereign debt and nominal bond risks in the presence of risk-averse investors. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, showing that countries with higher nominal bond-stock betas have significantly larger nominal bond risk premia and borrow less in local currency
Author: Mr. Leonardo Martinez Publisher: International Monetary Fund ISBN: Category : Business & Economics Languages : en Pages : 47
Book Description
This paper surveys the literature on sovereign debt from the perspective of understanding how sovereign debt differs from privately issue debt, and why sovereign debt is deemed safe in some countries but risky in others. The answers relate to the unique power of the sovereign. One the one hand, a sovereign has the power to tax, making debt relatively safe; on the other, it also has control over its territory and most of its assets, making debt enforcement difficult. The paper discusses debt contracts and the sovereign debt market, sovereign debt restructurings, and the empirical and theoretical literatures on the costs and causes of defaults. It describes the adverse impact of sovereign default risk on the issuing countries and what explains this impact. The survey concludes with a discussion of policy options to reduce sovereign risk, including fiscal frameworks that act as commitment devices, state-contingent debt, and independent and credible monetary policy.
Author: Wenxin Du Publisher: ISBN: Category : Languages : en Pages : 46
Book Description
We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy commitment. A government without commitment chooses excessively counter-cyclical inflation ex post, which leads risk-averse lenders to require a risk premium ex ante. This makes local currency debt too expensive from the government's perspective and thereby discourages the government from borrowing in its own currency.
Author: International Monetary Fund Publisher: International Monetary Fund ISBN: 1498342434 Category : Business & Economics Languages : en Pages : 88
Book Description
This paper explores how banking sector developments and characteristics influence the propagation of risks from the banking sector to sovereign debt, including how they affect the extent of fiscal costs of banking crises when those occur. It then proposes practices and policies for the fiscal authorities to help manage the risks and enhance crisis preparedness.
Author: Ms.Eva Jenkner Publisher: International Monetary Fund ISBN: 1484399137 Category : Business & Economics Languages : en Pages : 29
Book Description
Studies have shown that markets may underprice sub-national governments’ risk on the implicit assumption that these entities would be bailed out by their central government in case of financial difficulties. However, the question of whether sovereigns pay a premium on their own borrowing as a result of (implicitly or explicitly) guaranteeing sub-entities’ debt has been explored only little. We use an event study approach with separate equations for two levels of government to test for a simultaneous increase in sovereign risk premia and decrease in sub-national risk premia—or a de facto transfer of risk from the latter to the former—on the day a sovereign bailout is announced. Using daily financial market data for Spain and its autonomous regions from January 2010 to June 2013, we find support for our risk transfer hypothesis. We estimate that the Spanish sovereign’s spread may have increased by around 70 basis points as a result of the central government’s support for fiscally distressed comunidades autónomas.
Author: Michael D. Bordo Publisher: ISBN: Category : Languages : en Pages : 95
Book Description
In this paper we provide empirical measures of central bank credibility and augment these with historical narratives from eleven countries. To the extent we are able to apply reliable institutional information we can also indirectly assess their role in influencing the credibility of the monetary authority. We focus on measures of inflation expectations, the mean reversion properties of inflation, and indicators of exchange rate risk. In addition we place some emphasis on whether credibility is particularly vulnerable during financial crises, whether its evolution is a function of the type of crisis or its kind (i.e., currency, banking, sovereign debt crises). We find credibility changes over time are frequent and can be significant. Nevertheless, no robust empirical connection between the size of an economic shock (e.g., the Great Depression) and loss of credibility is found. Second, the frequency with which the world economy experiences economic and financial crises, institutional factors (i.e., the quality of governance) plays an important role in preventing a loss of credibility. Third, credibility shocks are dependent on the type of monetary policy regime in place. Finally, credibility is most affected by whether the shock can be associated with policy errors.
Author: Mr.David Hauner
Author: Tim Willems
Author: Mr.Giovanni Dell'Ariccia
Author: Wenxin Du
Author: Mr. Leonardo Martinez
Author: Wenxin Du
Author: International Monetary Fund
Author: Eduardo Borensztein
Author: Ms.Eva Jenkner
Author: Michael D. Bordo