David Hauner

Explaining efficiency differences among large German and Austrian banks

Cost-efficiency, scale efficiency, and productivity change are estimated by data envelopment analysis; and cost-efficiency is regressed on explanatory variables. No evidence is found for average productivity responding to deregulation over the period studied. State-owned banks are found to be more cost-efficient (likely owing to cheaper funds) and cooperative banks to be about as cost-efficient as private banks. Increasing economies of scale but decreasing economies of scope provide rationale for M&As among banks with similar product portfolios. Interbank and capital market funding is found to be more cost-efficient than deposits when the cost of retail networks is controlled.

Budget Deficits and Interest Rates: A Fresh Perspective

We extend the literature on budget deficits and interest rates in three ways: we examine both advanced and emerging economies and for the first time a large emerging market panel; explore interactions to explain some of the heterogeneity in the literature; and apply system GMM. There is overall a highly significant positive effect of budget deficits on interest rates, but the effect depends on interaction terms and is only significant under one of several conditions: deficits are high, mostly domestically financed, or interact with high domestic debt; financial openness is low; interest rates are liberalized; or financial depth is low.

How Do Canadian Budget Forecasts Compare With Those of Other Industrial Countries

This paper compares Canadian central government budget forecasting with forecasting by other industrial countries. While fiscal forecasting in Canada is governed by one of the strongest institutional frameworks, quantitative analysis suggests that budget projections of macroeconomic and fiscal aggregates have been more cautious than in other countries since the mid-1990s. The relatively volatile macroeconomic environment as well as institutional factors, such as Canada&aposs asymmetric deficit target, have likely contributed to this outcome.

Macroeconomic Effects of Pension Reform in Russia

Putting the pension system on a sustainable footing arguably remains the biggest challenge in Russias economic policies. The debate about the policy options was hitherto constrained by the absence of general equilibrium analysis. This paper fills this gap by simulating their macroeconomic effects in a DSGE model calibrated to Russias economy-the first of its kind to the best of our knowledge. The results suggest that a minimum benefit level in the public system should optimally be financed through lower government consumption, while higher taxation of labor and capital should be avoided. Reducing public investment spending is superior to increasing consumption taxes unless investment generates high rates of return.

Budget Deficits and Interest Rates

for the first time in more than two decades. Indeed, mounting surpluses were projected for as far as the eye could see. But in 2002, as revenues began to flow into Washington more slowly and expenditures continued to rise, those black figures turned red. No one knows for sure, of course, when this will change. But it seems likely that federal budget deficits will be the norm for at least the near future. Changing fiscal conditions have reignited a debate among economists: Do budget deficits cause long-term interest rates to rise? Unfortunately, there is no consensus on this issue. “Despite a long history of analysis of fiscal policy, there is much less solidly based knowledge than one would like about the effects of government deficits on the economy,” notes Gerald Dwyer Jr. in an article in the Journal of Money, Credit and Banking. For years, the conventional view was that government debt leads to increases in long-term interest rates, which decrease capital formulation, which ultimately leads to lower real income. How might public debt fuel higher long-term interest rates? The relationship “seems a trivial application of supply and demand,” Dwyer writes. “If the deficit increases, the supply of government bonds increases; everything else the same, the price of government bonds falls and the interest rate rises.” There is some evidence to support the claim that deficits do, in fact, raise long-term interest rates. In a recent paper, Thomas Laubach, an economist at the Federal Reserve’s Board of Governors, wrote that the “estimated effects of government debt and deficits on interest rates are statistically and economically significant: a 1 percentage point increase in the projected deficit-to-GDP ratio is estimated to raise long-term interest rates by roughly 25 basis points.” But the positive correlation between budget deficits and higher long-term interest rates doesn’t always hold up under empirical testing. “There are three periods during which the federal deficit has exceeded 10 percent of national income. In none of these periods did interest rates rise appreciably. Regression analysis applied to data from these three periods has not uncovered a positive association between deficits and interest rates,” writes Paul Evans in a paper published in the American Economic Review. “There also appears to be no evidence for a positive association between deficits and interest rates during the postwar period. I conclude from this survey that the concerns of the popular press and many economists may be misplaced.” Likewise, Charles Plosser has been unable to find a positive correlation between public debt and higher interest rates in two papers for the Journal of Monetary Economics. The reason why some researchers have been unable to find such a correlation might be explained by the “Ricardian equivalence” theorem. This theorem is based on the notion that people are far-sighted and view deficits as simply postponed tax liabilities, which they will eventually have to pay. “The Ricardian equivalence theorem can account for the tenuousness of any relationship between government debt and the interest rate. Under certain conditions, an increase in the supply of government debt that is not acquired by the Federal Reserve and that finances a nondistortionary change in taxes does not affect the current and expected future opportunity sets of private agents,” writes Dwyer. “Hence, private agents’ current and expected future consumption are unchanged, the increase in private saving exactly equals the increase in the deficit, and the increase in the demand for government securities exactly equals the increase in the supply of government securities.” Robert Barro has become perhaps the leading proponent of the Ricardian equivalence theorem, first in a 1974 paper for the Journal of Political Economy and now in his textbook, Macroeconomics. None of this means that we should necessarily stop worrying about budget deficits. First, as Laubach’s paper demonstrates, the evidence isn’t as clear cut as proponents of the Ricardian equivalence theorem might claim. Second, even if budget deficits do not lead to higher interest rates, they are often the result of unwise government spending — spending that itself can produce distortions in the economy. Such spending should be avoided, no matter its effects on interest rates. In the end, the issue of whether it may be desirable, under certain circumstances, to run budget deficits involves more important questions than how those deficits will affect interest rates. It involves setting national priorities. For instance, we may, as a country, be willing to tolerate budget deficits in order to finance an important military campaign, as we did during World War II. Likewise, we may decide that it is desirable to run up some debt to pay the transition costs necessary to privatize the Social Security system. These are issues on which economics can shed some light. But they can’t be answered by economic analysis alone. RF B Y A A R O N S T E E L M A N LEGISLATIVEUPDATE

Fiscal Policy and Interest Rates: How Sustainable is the 'New Economy'?

This paper explores the determinants of long-term government bond yields in the Group of Seven (G-7) economies and analyzes the factors that could explain the conundrum of very low rates in the face of a variety of adverse factors in recent years. In particular, the paper focuses on the deteriorating fiscal position in the G-7 economies and enquires which factors could have offset their impact on long-term interest rates, and how sustainable they are likely to be. A model of interest rate determination is elaborated and estimated for the G-7, with explicit emphasis on capital flows and public savings. The results suggest a high likelihood of a substantial impact of the weaker budgetary positions in the G-7 on global interest rates when the offsetting unprecedented capital flows slow down.

Benchmarking the Efficiency of Public Expenditure in the Russian Federation

This paper benchmarks the efficiency of public expenditure in the social sectors in the Russian Federation relative to other countries and among the countrys regions. It finds that there is substantial room for efficiency gains, particularly in health care and social protection, although less so in education. An econometric analysis of efficiency differences between the regions suggests that they are positively related to per capita income and the quality of governance and democratic control, while they are negatively related to the share of federal transfers in the respective regions government revenue and the level of spending relative to gross regional product.

Financial Globalization and Fiscal Perfomance in Emerging Markets

In recent years financial globalization and benign global market conditions have helped emerging markets in their external financing and budgetary positions. This paper examines three related issues: (i) the importance of the impact of the benign financial environment on fiscal performance; (ii) the likely fiscal impact of a reversal in this environment; and (iii) the potential contribution of fiscal reforms to maintaining favorable market access. The results suggest that the benefits from the benign environment have been substantial and that the potential reversal of the favorable external conditions underlines the need for further fiscal reforms.

Ensuring Fiscal Sustainability in G-7 Countries

Rising longevity, falling fertility rates, and the retirement of the baby boom generation will substantially raise age-related government spending in most advanced and many emerging market countries. This paper assesses the evolution of fiscal sustainability for each of the G-7 countries using two standard primary gap indicators. The estimated fiscal adjustment required to ensure long-run fiscal sustainability is substantial for all G-7 countries. In particular, ensuring fiscal sustainability would require an average improvement in the primary balance of about 4 percentage points of GDP. While the overall adjustment required to achieve long-run fiscal sustainability in G-7 countries is large, there are significant growth benefits to putting public finances on a sustainable footing in the near term versus delayed adjustment.

Policy Credibility and Sovereign Credit - The Case of New EU Member States

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.