Antonio Afonso

The macroeconomic effects of fiscal policy

We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression (B-SVAR) approach. We identify fiscal policy shocks via a partial identification scheme, but also: (i) include the feedback from government debt; (ii) look at the impact on the composition of output; (iii) assess the effects on asset markets; (iv) use quarterly data; and (v) analyse empirical evidence from the US, the UK, Germany and Italy. The results show that government spending shocks, in general, have a small effect on Gross Domestic Product (GDP); lead to important ‘crowding-out’ effects; have a varied impact on housing prices and generate a quick fall in stock prices. Government revenue shocks generate a mixed effect on housing prices and a small and positive effect on stock prices. The empirical evidence also suggests that it is important to explicitly consider the government debt dynamics in the model.

Public Sector Efficiency: Evidence for New EU Member States and Emerging Markets

In this article, we analyse public sector efficiency in the new member states of the EU compared to that in emerging markets. After a conceptual discussion of expenditure efficiency measurement, we compute efficiency scores and rankings by applying a range of measurement techniques. The study finds that expenditure efficiency across new EU member states is rather diverse especially as compared to the group of top performing emerging markets in Asia. Econometric analysis shows that higher income, civil service competence and education levels as well as the security of property rights seem to facilitate the prevention of inefficiencies in the public sector.

Understanding the Determinants of Government Debt Ratings: Evidence for the Two Leading Agencies

I conduct an analysis of the possible determinants of sovereign credit ratings assigned by the two leading credit rating agencies, Moodys and Standard and Poors, by using both a linear and a logistic transformation of the rating scales. Of the large number of variables that can be used, the set of explanatory variables selected in this study is significant in explaining the credit ratings. Namely, six variables appear to be the most relevant to determine a countrys credit rating: GDP per capita, external debt, level of economic development, default history, real growth rate and inflation rate.

Expansionary Fiscal Consolidations in Europe – New Evidence

Using alternative approaches to determine fiscal episodes, I assess expansionary fiscal consolidations in Europe, via panel models for private consumption. There is some concurring evidence for several budgetary spending items while the asymmetric effects of fiscal episodes do not seem to be corroborated by the results.

Bootstrap Panel Granger-Causality Between Government Budget and External Deficits for the EU

We investigate the existence of Granger-causality between current account and government budget balances over the period 1970-2007, for different EU and OECD country groupings. We use a panel-data approach based on SUR systems and Wald tests with country specific bootstrap critical values. Our results show a causal relation from budget deficits to current account deficits for several EU countries: Bulgaria, Czech Republic, Estonia, Finland, France, Italy, Hungary, Lithuania, Poland, and Slovakia, along the lines of the so-called twin-deficit relationship. Considering the effective real exchange rate in the SUR system does not substantially alter the results.

Non-parametric Approaches to Education and Health Expenditure Efficiency in OECD Countries

We address the efficiency of expenditure in education and health sectors for a sample of OECD countries by applying two alternative non-parametric methodologies: FDH and DEA. Those are two areas where public expenditure is of great importance so that findings have strong implications in what concerns public sector efficiency. When estimating the efficiency frontier we use both measures of expenditure and quantity inputs. We believe this approach to be advantageous since a country may well be efficient from a technical point of view but appear as inefficient if the inputs it uses are expensive. Efficient outcomes across sectors and analytical methods seem to cluster around a small number of core countries, even if for different reasons: Finland, Japan, Korea and Sweden.

Relative Efficiency of Health Provision: a DEA Approach with Non-discretionary Inputs

We estimate a semi-parametric model of health production process using a two-stage approach for OECD countries. By regressing data envelopment analysis output efficiency scores on non-discretionary variables, both using Tobit analysis and a single and double bootstrap procedure, we show that inefficiency is strongly related to GDP per head, the education level, and health behaviour such as obesity and smoking habits. The used bootstrapping procedure corrects likely biased DEA output scores taking into account that environmental variables are correlated to output and input variables.

Ordered response models for sovereign debt ratings

Using ordered logit and probit plus random effects ordered probit approaches, we study the determinants of sovereign debt ratings. We found that the last procedure is the best for panel data as it takes into account the additional cross-section error.

Consumption, Wealth, Stock and Government Bond Returns: International Evidence

In this paper, we show, from the consumer’s budget constraint, that the residuals of the trend relationship among consumption, aggregate wealth, and labour income should predict both stock returns and government bond yields. We use data for several OECD countries and find that when agents expect future stock returns to be higher, they will temporarily allow consumption to rise. Regarding government bond yields, when bonds are seen as a component of asset wealth, then investors react in the same way. If, however, the increase in the yields is perceived as signalling a future rise in taxes, then they will temporarily reduce their consumption.

The Determinants of Sovereign Bond Yield Spreads in the EMU

We use a panel of euro area countries to assess the determinants of long-term sovereign bond yield spreads over the period 1999.01-2010.12. We find that, unlike the period preceding the global financial crisis, European government bond yield spreads are well explained by macro- and fiscal fundamentals over the crisis period. We also find that the menu of macro and fiscal risks priced by markets has been significantly enriched since March 2009, including the risk of the crisis’ transmission among EMU member states, international risk and liquidity risk. Finally, we find that sovereign credit ratings are statistically significant in explaining spreads, yet compared to macro- and fiscal fundamentals their role is limited.