Philipp Rother

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.

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.

Fiscal Sustainability using Growth-Maximising Debt Targets

This article highlights the importance of debt-related fiscal rules and derives growth-maximizing public debt ratios from a simple theoretical model. On the basis of evidence on the productivity of public capital, we estimate public debt targets that governments should maintain if they wish to maximize growth for panels of OECD, EU and euro area countries. These are not arbitrary numbers, but are founded on long-run optimizing behaviour assuming that governments implement the golden rule of financing; that is, they contract debt only to finance public investment. Our estimates suggest that the euro area should target debt levels of around 50% of GDP if member states are to have common targets. That is about 15% points lower than the estimate for the growth-maximizing debt ratio in our OECD sample and comfortably within the Stability and Growth Pact’s debt ceiling of 60% of GDP. We also indicate how forward-looking budget reaction functions fit into a debt targeting framework.

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.

The impact of expenditure rules on budgetary discipline over the cycle

We study the impact of expenditure rules on the propensity for governments to deviate from their expenditure plans in response to surprising cyclical developments. Theoretical considerations suggest that due to political fragmentation in the budgetary process expenditure policy might be prone to a procyclical bias. However, this tendency may be mitigated by strictly enforced expenditure rules. These hypotheses are tested against data from a panel of EU Member States. Our key findings are that (1) deviations between actual and planned government expenditure tend to be positively related to output gap surprises, and (2) expenditure rules reduce this procyclical bias. These results are particularly pronounced when the analysis is confined to spending items with a high degree of budgetary flexibility.

Explaining the Behavior of Financial Intermediation: Evidence from Transition Economies

This paper investigates the effects of macroeconomic and structural variables on financial intermediation. To this end, it presents a theoretical foundation for two new measures of intermediation, the money multiplier and the ratio of private sector credit to monetary base. Results from panel estimations covering 19 transition economies indicate that policy makers need to address in particular the problems of bad loans on bank balance sheets and high market concentration while maintaining a stable macroeconomic environment. Further variables, such as minimum reserve requirements and the capital adequacy ratio, are found to possess less explanatory power.

Inflation in Albania

As Albania has succeeded in reducing inflation to very low levels, understanding the driving forces behind the behaviour of the price level becomes increasingly important for policy design. In particular, persistent changes in relative prices may contribute to movements of the aggregate price level, and policy makers need to decide to what extent such effects should be accommodated. This article provides insight into the nature and extent of relative price adjustments during the transition period, and argues that some of their inflationary effects should not be resisted.

Money Demand and Regional Monetary Policy in the West African Economic and Monetary Union

Regional monetary integration, financial liberalization, and the adoption of indirect policy instruments have changed the conditions for monetary policy in the West African Economic and Monetary Union (WAEMU). The stability of money demand has become a crucial element for monetary policy. This paper presents empirical money demand estimations for regional monetary aggregates and analyzes their stability and forecast performance. The estimations result in a stable relationship for narrow money (M1). Consequently, the region’;s central bank, the BCEAO, can continue to conduct monetary policy in line with the fixed exchange rate system if it succeeds in maintaining financial stability.