Much Ado About Nothing: Sovereign Ratings and Government Bond Yields in the OECD
Makram El-Shagi
IWH Discussion Papers,
No. 22,
2016
Abstract
In this paper, we propose a new method to assess the impact of sovereign ratings on sovereign bond yields. We estimate the impulse response of the interest rate, following a change in the rating. Since ratings are ordinal and moreover extremely persistent, it proves difficult to estimate those impulse response functions using a VAR modeling ratings, yields and other macroeconomic indicators. However, given the highly stochastic nature of the precise timing of ratings, we can treat most rating adjustments as shocks. We thus no longer rely on a VAR for shock identification, making the estimation of the corresponding IRFs well suited for so called local projections – that is estimating impulse response functions through a series of separate direct forecasts over different horizons. Yet, the rare occurrence of ratings makes impulse response functions estimated through that procedure highly sensitive to individual observations, resulting in implausibly volatile impulse responses. We propose an augmentation to restrict jointly estimated local projections in a way that produces economically plausible impulse response functions.
Read article
14.04.2016 • 15/2016
Joint Economic Forecast Spring 2016: Upturn Remains Moderate – Economic Policy Lacks Growth Orientation
Economic research institutes now estimate that gross domestic product will increase by 1.6 percent in 2016, instead of 1.8 percent as forecast in autumn 2015.
Read
Taking the First Step - What Determines German Laser Source Manufacturers' Entry into Innovation Networks?
Jutta Günther, Muhamed Kudic, Andreas Pyka
International Journal of Innovation Management,
No. 5,
2015
Abstract
Early access to technological knowledge embodied in the industry’s innovation network can provide an important competitive advantage to firms. While the literature provides much evidence on the positive effects of innovation networks on firms’ performance, not much is known about the determinants of firms’ initial entry into such networks. We analyze firms’ timing and propensity to enter the industry’s innovation network. More precisely, we seek to shed some light on the factors affecting the duration between firm founding and its first cooperation event. In doing so, we apply a unique longitudinal event history dataset based on the full population of German laser source manufacturers. Innovation network data stem from official databases providing detailed information on the organizations involved, subject of joint research and development (R&D) efforts as well as start and end times for all publically funded R&D projects between 1990 and 2010. Estimation results from a non-parametric event history model indicate that micro firms enter the network later than small-sized or large firms. An in-depth analysis of the size effects for medium-sized firms provides some unexpected findings. The choice of cooperation type makes no significant difference for the firms’ timing to enter the network. Finally, the analysis of geographical determinants shows that cluster membership can, but do not necessarily, affect a firm’s timing to cooperate.
Read article
The Joint Dynamics of Sovereign Ratings and Government Bond Yields
Makram El-Shagi, Gregor von Schweinitz
Abstract
In the present paper, we build a bivariate semiparametric dynamic panel model to repro-duce the joint dynamics of sovereign ratings and government bond yields. While the individual equations resemble Pesaran-type cointegration models, we allow for different long-run relationships in both equations, nonlinearities in the level effect of ratings, and asymmetric effects in changes of ratings and yields. We find that the interest rate equation and the rating equation imply significantly different long-run relationships. While the high persistence in both interest rates and ratings might lead to the misconception that they follow a unit root process, the joint analysis reveals that they converge slowly to a joint equilibrium. While this indicates that there is no vicious cycle driving countries into default, the persistence of ratings is high enough that a rating shock can have substantial costs. Generally, the interest rate adjusts rather quickly to the risk premium that is in line with the rating. For most ratings, this risk premium is only marginal. However, it becomes substantial when ratings are downgraded to highly speculative (a rating of B) or lower. Rating shocks that drive the rating below this threshold can increase the interest rate sharply, and for a long time. Yet, simulation studies based on our estimations show that it is highly improbable that rating agencies can be made responsible for the most dramatic spikes in interest rates.
Read article
Understanding the Great Recession
Mathias Trabandt, Lawrence J. Christiano, Martin S. Eichenbaum
American Economic Journal: Macroeconomics,
No. 1,
2015
Abstract
We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small drop in inflation that occurred during the Great Recession.
Read article
The Halle Economic Projection Model
Sebastian Giesen, Oliver Holtemöller, Juliane Scharff, Rolf Scheufele
Economic Modelling,
No. 4,
2012
Abstract
In this paper we develop an open economy model explaining the joint determination of output, inflation, interest rates, unemployment and the exchange rate in a multi-country framework. Our model -- the Halle Economic Projection Model (HEPM) -- is closely related to studies published by Carabenciov et al. Our main contribution is that we model the Euro area countries separately. In doing so, we consider Germany, France, and Italy which represent together about 70 percent of Euro area GDP. The model combines core equations of the New-Keynesian standard DSGE model with empirically useful ad-hoc equations. We estimate this model using Bayesian techniques and evaluate the forecasting properties. Additionally, we provide an impulse response analysis and a historical shock decomposition.
Read article
Municipality Size and Efficiency of Local Public Services: Does Size Matter?
Peter Bönisch, Peter Haug, Annette Illy, L. Schreier
IWH Discussion Papers,
No. 18,
2011
published in: FinanzArchiv
Abstract
Similarly to western Germany in the 1960s and 1970s, the eastern part of Germany has experienced a still ongoing process of numerous amalgamations among counties, towns and municipalities since the mid-1990s. The evidence in the economic literature is mixed with regard to the claimed expenditure reductions and efficiency gains from municipal mergers. We therefore analyze the global efficiency of the municipalities in Saxony-Anhalt, for the first time in this context, using a double-bootstrap procedure combining DEA and truncated regression. This allows including environmental variables to control for exogenous determinants of municipal efficiency. Our focus thereby is on institutional and fiscal variables. Moreover, the scale efficiency is estimated to find out whether large units are necessary to benefit from scale economies. In contrast to previous studies, we chose the aggregate budget of municipal associations (“Verwaltungsgemeinschaften”) as the object of our analysis since important competences of the member municipalities are settled on a joint administrative level. Furthermore, we use a data set that has been carefully adjusted for bookkeeping items and transfers within the communal level. On the “eve” of a mayor municipal reform the majority of the municipalities were found to have an approximately scale-efficient size and centralized organizational forms (“Einheitsgemeinden”) showed no efficiency advantage over municipal associations.
Read article
Do Banks Benefit from Internationalization? Revisiting the Market Power-Risk Nexus
Claudia M. Buch, C. T. Koch, Michael Koetter
Abstract
Recent developments on international financial markets have called the benefits of
bank globalization into question. Large, internationally active banks have
acquired substantial market power, and international activities have not
necessarily made banks less risky. Yet, surprisingly little is known about the
actual link between bank internationalization, bank risk, and market power.
Analyzing this link is the purpose of this paper. We jointly estimate the
determinants of risk and market power of banks, and we analyze the effects of
changes in terms of the number of foreign countries (the extensive margin) and
the volume of foreign assets (the intensive margin). Our paper has four main
findings. First, there is a strong negative feedback effect between risk and market
power. Second, banks with higher shares of foreign assets, in particular those held
through foreign branches, have higher market power at home. Third, holding
assets in a large number of foreign countries tends to increase bank risk. Fourth,
the impact of internationalization differs across banks from different banking
groups and of different size.
Read article
A First Look on the New Halle Economic Projection Model
Sebastian Giesen, Oliver Holtemöller, Juliane Scharff, Rolf Scheufele
Abstract
In this paper we develop a small open economy model explaining the joint determination of output, inflation, interest rates, unemployment and the exchange rate in a multi-country framework. Our model – the Halle Economic Projection Model (HEPM) – is closely related to studies recently published by the International
Monetary Fund (global projection model). Our main contribution is that we model the Euro area countries separately. In this version we consider Germany and France, which represent together about 50 percent of Euro area GDP. The model allows for country specific heterogeneity in the sense that we capture different adjustment patterns to economic shocks. The model is estimated using Bayesian techniques. Out-of-sample and pseudo out-of-sample forecasts are presented.
Read article