Jiri Jonas

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.

Sovereign Risk: Are the EU's New Member States Different?

This article examines whether rating agencies and investors perceive the sovereign risk of the new member states (NMS) of the European Union (EU) as different from that of other emerging markets. The results suggest the NMS have enjoyed favourable treatment since somewhere between 2002 and 2004, amounting to an advantage of 1.8 notches in ratings and 100 basis points in foreign currency spreads. We argue that, although several explanations of this effect are possible, it is most likely because of higher policy credibility bestowed by EU membership.

Great Recession and Fiscal Squeeze at U.S. Subnational Government Level

The paper discusses the fiscal impact of the Great Recession of 2007-08 on state and local governments in the United States. It documents the sharp decline in tax revenue and discusses how states responded to close the budget gaps in order to obey the balanced budget provisions. It highligts the procyclical nature of this policy response, provides a brief comparison with subnational policy stances in other advanced economies, and discusses some options for making subnational fiscal policy less procyclical within the framework of current rules.

Collect More, Spend Better : Public Investment in Asian Frontier Markets

We use a dynamic small open economy model to explore the macroeconomic impact of alternative public investment scaling-up scenarios, analyzing how improving the efficiency of capital spending and of tax revenue collection affect growth and debt sustainability for three fast-growing Southeast Asian economies: Cambodia, Sri Lanka, and Vietnam. We show that a gradual public investment profile is more favorable than front-loading capital spending because we assume governments are able to gradually learn how to invest more efficiently, accelerating public capital accumulation and therefore growth. We discuss the pros and cons of alternative financing options and identify the financing mix that generates the best macroeconomic outcome. Sometimes overlooked, improving the efficiency of revenue collection over time may ease the burden of fiscal adjustment, achieving higher GDP growth with substantially lower debt-to-GDP ratios, and will help policymakers efficiently meet the challenge of addressing large infrastructure gaps while maintaining debt sustainability.

Fiscal Objective in the Post IMF Program World; The Case of Albania

The paper discusses the challenges facing Albanias fiscal policy following the graduation from the IMF programs. It argues that Albanias public debt remains too high and needs to be reduced. Strengthening the fiscal framework, including by introducing a numerical fiscal rule, could help achieve this objective. The paper discusses two alternative rules, with the objective of achieving a gradual decline in the public debt ratio. One rule would limit nominal expenditure growth, with a correction mechanism to guard against revenue slippages and other shocks. An alternative rule would limit the growth in nominal public debt.

A toolkit for Assessing Fiscal Vulnerabilities and Risks in Advanced Economies

This paper presents a range of tools and indicators for analyzing fiscal vulnerabilities and risks for advanced economies. The analysis covers key short-, medium- and long-term dimensions. Short-term pressures are captured by assessing (i) gross funding needs, (ii) market perceptions of default risk, and (iii) stress dependence among sovereigns. Medium- and long-term pressures are summarized by (iv) medium- and long-term budgetary adjustment needs, (v) susceptibility of debt projections to growth and interest rate shocks, and (vi) stochastic risks to medium-term debt dynamics. Aiming to cover a wide range of advanced economies and minimize data lags, has also influenced the selection of empirical methods. Due to these features, they can, for example, help inform the joint IMF-FSB Early Warning Exercise (EWE) on the fiscal dimensions of economic risks.