Moral hazard and bail-out in fiscal federations: evidence for the German Länder

We identify investor moral hazard in the German fiscal federation. Our identification strategy is based on a variable, which was used by the German Federal Constitutional Court as an indicator to determine eligibility of two German states (Länder) to a bail-out, the interest payments-to-revenue ratio. While risk premia measured in the German sub-national bond market react significantly to the relative debt level of a state (Land), we also find that a larger interest payments-to-revenue ratio counter-intuitively lowers risk premia significantly. Furthermore, with increasing values the risk premia decrease more strongly. This is evidence of investor moral hazard, because a larger indicator value increases the likelihood of receiving a bail-out payment. Quantitatively, the effects are, however, quite small. Our findings are robust to a variety of sample changes. In addition, we provide a case study of the recent Federal Constitutional Court ruling on the Land Berlin, which had filed for additional federal funds. The negative response of the court did not lead to a change in financial markets' bail-out expectations. In sum, our results indicate significant investor moral hazard in the sub-national German bond market. --moral hazard,bail-out,sovereign bond spreads,fiscal federalism,Germany

Expected budget deficits and interest rate swap spreads - Evidence for France, Germany and Italy

This study analyses whether expected budget deficits have an impact on interest rate swap spreads in France, Germany and Italy. We use monthly deficit forecasts from financial market participants to take the forward-looking behaviour of financial markets into account. Results of a SUR estimation show no significant impact of expected deficits on swap spreads over the whole sample period (1994-2004). However, we find an increase in market discipline for Germany and France since the signing of the Stability and Growth Pact, and for Germany also since the start of European monetary union. --Budget deficits,interest rate swap spreads,EMU,Stability and Growth Pact

The macroeconomic effects of exogenous fiscal policy shocks in Germany: a disaggregated SVAR analysis

We investigate the short-term effects of fiscal policy shocks on the German economy following the SVAR approach by Blanchard and Perotti (2002). We find that direct government expenditure shocks increase output and private consumption on impact with low statistical significance, while they decrease private investment, though insignificantly. For the sub-category government investment – in contrast to government consumption – a positive output effect is found, which is statistically significant until 12 quarters ahead. Allowing for anticipation effects of fiscal policy does not change the sign of the positive consumption response. Anticipated expenditure shocks have significant effects on output when the shock is realized, but not in the period of anticipation. In sum, effects of expenditure shocks are only short-lived. Government net revenue shocks do not affect output with statistical significance. However, when splitting up this aggregate, direct taxes lower output significantly, while small indirect tax revenue shocks have little effects. Compensation of public employees is equally not effective in stimulating the economy. --Fiscal policy,government spending,net revenue,policy anticipation,structural vector autoregression

SHOULD WE CARE ABOUT THE COMPOSITION OF TAX-BASED STIMULUS PACKAGES?

© 2015 Western Economic Association International We investigate the effects of tax policy shocks on the U.S. economy over the 1972:3–2008:4 period within a structural vector autoregressive (SVAR) framework. Disaggregating tax shocks suggests that the positive output multipliers documented for total taxes by the previous literature are present only for indirect tax innovations. We also show that both labor and corporate taxes have similar effects on output, with labor tax multipliers being slightly larger in magnitude. The positive and negative responses of inflation following respectively corporate and labor tax shocks imply that former shocks work through aggregate supply, whereas the latter work predominantly through aggregate demand. (JEL C32, E62, H20)

The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis

We investigate the effects of fiscal policy shocks on the German economy extending the SVAR approach of Blanchard and Perotti (2002). Direct government expenditure shocks are found to increase output and private consumption on impact. The output multiplier is smaller than one and is falling rather quickly reaching zero after 3 years. Government operating expenditure has sizeable positive effects on output, in the long run in particular due to public capital formation. Compensation of public employees is not effective in stimulating the economy.Government net revenue shocks do not affect output significantly. Indirect taxes have little effects, while direct taxes lower output significantly. Overall, the effects of fiscal policy are short-lived with the exception of public investment increases.Fiscal policy, government spending, net revenue, structural vector autoregression