This paper examines the role of primary fiscal balances as a signaling device in a world in which investors are uncertain about the sovereign’s commitment to honor its obligations. Based on the Drudi-Prati model that rationalizes delayed stabilization and debt accumulation, we verify the existence of a rating (sovereign spreads) function that depends negatively (positively) on the debt ratio and negatively (positively) on the primary balance. This relationship, however, is non-monotonic and is conditioned on a threshold debt level. At low debt levels, the primary balance has an ambiguous relationship with sovereign spreads, but as debt increases, the primary balance’s effect on spreads is magnified. Beyond a given threshold, the committed sovereign has the incentive to tighten fiscal policy, while the weak government does not. Using data for Argentina, Brazil, and Turkey, for the period 1994-2007, we show that during their most recent crises, Brazil and Turkey can be characterized as dependable (in Drudi-Prati’s terminology), while Argentina’s incentives to use the primary balance in the late nineties were not as determinant. The explanatory power of the model improves by allowing heteroskedasticity in the shocks to each country and heterogeneity across countries in the coefficient estimates. Hence, though spreads react to debt levels and to primary balances in these countries, they do so with different intensity.
{"title":"Tangos, Sambas or Belly Dancing? Or, Do Spreads Dance to the Same Rhythm? Signaling Regime Sustainability in Argentina, Brazil and Turkey","authors":"Santiago Herrera, Ferhan Salman","doi":"10.2139/ssrn.1997158","DOIUrl":"https://doi.org/10.2139/ssrn.1997158","url":null,"abstract":"This paper examines the role of primary fiscal balances as a signaling device in a world in which investors are uncertain about the sovereign’s commitment to honor its obligations. Based on the Drudi-Prati model that rationalizes delayed stabilization and debt accumulation, we verify the existence of a rating (sovereign spreads) function that depends negatively (positively) on the debt ratio and negatively (positively) on the primary balance. This relationship, however, is non-monotonic and is conditioned on a threshold debt level. At low debt levels, the primary balance has an ambiguous relationship with sovereign spreads, but as debt increases, the primary balance’s effect on spreads is magnified. Beyond a given threshold, the committed sovereign has the incentive to tighten fiscal policy, while the weak government does not. Using data for Argentina, Brazil, and Turkey, for the period 1994-2007, we show that during their most recent crises, Brazil and Turkey can be characterized as dependable (in Drudi-Prati’s terminology), while Argentina’s incentives to use the primary balance in the late nineties were not as determinant. The explanatory power of the model improves by allowing heteroskedasticity in the shocks to each country and heterogeneity across countries in the coefficient estimates. Hence, though spreads react to debt levels and to primary balances in these countries, they do so with different intensity.","PeriodicalId":178259,"journal":{"name":"2008 Fiscal Sustainability: Analytical Developments & Emerging Policy Issues Conference (Archive)","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-04-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129993359","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we suggest a set of indicators about the future performance of the Spanish public pension system and a suitable method of representing their uncertainty, in order to improve the communication to the public opinion about its main future challenges. Spain seems a particularly interesting case in Europe to illustrate our proposals, since the social security system has been in surplus for nine consecutive years, in sharp contrast to the projections made just a decade ago, but, at the same time, most projections foresee for Spain one of the highest increases in public expenditure among EU countries due to ageing. We argue that simple, transparent, credible, public and periodic indicators, which take explicitly into account the uncertainty about future demographic, economic and institutional developments, may contribute to improve the debate on the policies needed to strengthen the pension system.
{"title":"Projecting Pension Expenditure in Spain: On Uncertainty, Communication and Transparency","authors":"R. Doménech, Á. Melguizo","doi":"10.2139/ssrn.1997271","DOIUrl":"https://doi.org/10.2139/ssrn.1997271","url":null,"abstract":"In this paper we suggest a set of indicators about the future performance of the Spanish public pension system and a suitable method of representing their uncertainty, in order to improve the communication to the public opinion about its main future challenges. Spain seems a particularly interesting case in Europe to illustrate our proposals, since the social security system has been in surplus for nine consecutive years, in sharp contrast to the projections made just a decade ago, but, at the same time, most projections foresee for Spain one of the highest increases in public expenditure among EU countries due to ageing. We argue that simple, transparent, credible, public and periodic indicators, which take explicitly into account the uncertainty about future demographic, economic and institutional developments, may contribute to improve the debate on the policies needed to strengthen the pension system.","PeriodicalId":178259,"journal":{"name":"2008 Fiscal Sustainability: Analytical Developments & Emerging Policy Issues Conference (Archive)","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-04-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114877417","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Kastrop and Velleuer examine the German experience with sustainability reporting. They consider its background and rationale in the context of the aging of the German population. They give an overview of the first comprehensive report on the effects of demographic change published by the Federal Ministry of Finance in 2005, point to the lessons learned from this first exercise and highlight the changes introduced in the preparation of the second sustainability report, which is based on updated projections. Kastrop and Velleuer evaluate how sustainability reporting can be relevant for the policy debate and illustrate the findings of a recent study using insights gained by behavioral economics. They also address the issue of uncertainty in the projections and conclude by examining how to deal with long-term risks in the formulation of medium-term budgetary targets.
{"title":"The German Experience with Sustainability Reporting","authors":"C. Kastrop, Britta Velleuer","doi":"10.2139/SSRN.1997278","DOIUrl":"https://doi.org/10.2139/SSRN.1997278","url":null,"abstract":"Kastrop and Velleuer examine the German experience with sustainability reporting. They consider its background and rationale in the context of the aging of the German population. They give an overview of the first comprehensive report on the effects of demographic change published by the Federal Ministry of Finance in 2005, point to the lessons learned from this first exercise and highlight the changes introduced in the preparation of the second sustainability report, which is based on updated projections. Kastrop and Velleuer evaluate how sustainability reporting can be relevant for the policy debate and illustrate the findings of a recent study using insights gained by behavioral economics. They also address the issue of uncertainty in the projections and conclude by examining how to deal with long-term risks in the formulation of medium-term budgetary targets.","PeriodicalId":178259,"journal":{"name":"2008 Fiscal Sustainability: Analytical Developments & Emerging Policy Issues Conference (Archive)","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-04-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128553578","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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