Christiane Nickel

Fiscal variables and bond spreads: evidence from eastern European countries and Turkey

We investigate the impact of fiscal variables on bond yield spreads relative to US Treasury bonds in the Czech Republic, Hungary, Poland, Russia and Turkey from May 1998 to December 2007. To account for the importance of market expectations we use projected values for fiscal and macroeconomic variables generated from Consensus Economics Forecasts. Moreover, we compare results from panel regressions with those from country (seemingly unrelated regression) estimates. We find that, contrary to the evidence suggested by panel estimations, the role of the individual explanatory variables, including the importance of fiscal variables, varies significantly across countries when using the SUR specification.

Some Shocking Aspects of EMU Enlargement

This paper uses a structural vector autoregression to examine differences in demand and supply shocks and the response to these shocks between EMU member countries and three other groups of countries. The first group includes non-EMU EU countries, the second group EFTA countries and the third group central and eastern European countries which seek EU membership over the next years. Our results suggest that, so far, EMU enlargement towards central and eastern European countries would involve significantly higher costs than EMU enlargement towards countries of the other two groups.

Assessing Fiscal Soundness: Theory and Practice

This paper presents a survey of methods for assessing fiscal soundness, i.e. the capability of governments to honour their obligations in the short run and in the long run. The need for a comprehensive monitoring of fiscal soundness derives from the risks to economic stability that arise from the actual or expected difficulty a government may have in honouring its obligations. For the long run, methods derived from the governments intertemporal budget constraint make it possible to assess the size of a necessary adjustment to achieve sustainability of the debt burden. Uncertainty regarding shocks to the fiscal situation or the behaviour of financial market participants calls for the monitoring of financial flows and government obligations in the short run. Vigilance needs to be all the higher, the greater the uncertainty regarding long-term sustainability.

Climate Change Brings Stormy Days: Case Studies on the Impact of Extreme Weather Events on Public Finances

This paper explores some implications of climate change for fiscal policies by assessing the impact of extreme weather events on public budgets. It presents selected case studies on the basis of available data for extreme weather events in the EU and the US that have occurred since 1990. We derive estimates for the budgetary impact of such events on the basis of the estimated economic damage and with respect to public relief payments. Based on these, we discuss implications for fiscal policy and publicly-provided disaster insurance. Our policy conclusions point to the enhanced need to reach and maintain sound fiscal positions given that climate change is expected to cause an increase in the number and severity of natural disasters.

How Symmetric Are the Shocks and the Shock Adjustment Dynamics Between the Euro Area and Central and Eastern European Countries

We use a structural vector autoregression model to identify and compare demand and supply shocks between euro area countries and central and eastern European countries (CEECs). The shocks and the shock adjustment dynamics of these countries are also compared to western European EU countries that have not yet adopted the euro. Focusing on the period 1993-2001, we find that there are still considerable differences in the shocks and in the adjustment process to shocks between the euro area and the CEECs. However, there are indications that the differences between several individual CEECs and the euro area have declined recently.

Signalling Fiscal Stress in the Euro Area: A Country-Specific Early Warning System

The sovereign debt crisis in the euro area has raised interest in early warning indicators, aimed at signalling the build-up of fiscal stress in advance and helping prevent crises by means of a timely counteraction of fiscal and macroeconomic policies. This paper presents possible improvements to enhance existing early warning indicators for fiscal stress, especially for the euro area. We show that a country-specific approach could strongly increase the signalling power of early warning systems. Finally, we draw policy conclusions for the setting-up and application of a system of early warning indicators for fiscal stress.

Pension Funds and Financial Markets: Evidence from the New EU Member States

The recently established pension funds in the new EU Member States face investment risks that stem from a challenging macroeconomic environment, including, inter alia, volatile inflation and shallow domestic capital markets. The question arises whether a move to funded pension system in such a volatile economic environment always increases the long-term sustainability of public finances. Against this background, this paper surveys the main challenges for pension systems and public finances in the new EU Member States and provides evidence on pension fund performance in recent years. We conclude that in some of these countries the limited diversification of assets, the impact of high inflation as well as the financial market turmoil may have indeed reduced the positive impact of systemic pension reforms on fiscal sustainability.

Ageing, Pension Reforms and Capital Market Development in the New EU Member States and Other Transition Countries

We present new data on asset allocations of mandatory pension funds in the new EU member states and in other transition countries. Our comparative national data presents a unique opportunity to compare pension reform progress across these countries from a capital market perspective. Our main finding is that in a number of new EU member states and other transition countries, under-diversification of assets threatens to undermine the impact of multi-pillar reform on fiscal sustainability.

The Effects of Capital Controls on Exchange Rate Volatility and Output

This paper extends the Dornbusch model of overshooting exchange rates to discuss both exchange rate and output effects of capital controls that involve additional costs for international asset transactions. We show that, on the one hand, such capital controls have the merit of reducing the volatility of exchange rates following a monetary shock. On the other hand, the implementation increases exchange rate volatility in the short run and induces costs for the real sector in the form of lower equilibrium output levels.