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Mr. Carlo Cottarelli and José Vinãls
In response to the worst economic crisis since the 1930s, government budgets and central banks have provided substantial support for aggregate demand and for the financial sector. In the process, fiscal balances have deteriorated, government liabilities and central bank balance sheets have been expanded, and risks of future losses for the public sector have increased.
Mr. Samir Jahjah
The main tasks of central banks are to secure price and financial stability. These objectives can, in times of crises, conflict with one another, and the central bank may have to renounce one of them in order to secure the other. In a monetary union, this trade-off can be exacerbated by the presence of highly indebted countries or by the risk of loose fiscal policies. This paper offers a simple theoretical model that captures the trade-off. Different fiscal institutions are compared in order to evaluate their impact on the conduct of monetary policy. More specifically, the fiscal criteria of the Maastricht Treaty and the Pact for Stability and Growth in Europe are analyzed in light of this model. Fiscal mechanisms exist to help prevent or minimize the risk of fiscal crises and the corresponding risk of central bank financing and inflation.
Mr. Serhan Cevik and João Tovar Jalles
Climate change is already a systemic risk to the global economy. While there is a large body of literature documenting potential economic consequences, there is scarce research on the link between climate change and sovereign risk. This paper therefore investigates the impact of climate change vulnerability and resilience on sovereign bond yields and spreads in 98 advanced and developing countries over the period 1995–2017. We find that the vulnerability and resilience to climate change have a significant impact on the cost government borrowing, after controlling for conventional determinants of sovereign risk. That is, countries that are more resilient to climate change have lower bond yields and spreads relative to countries with greater vulnerability to risks associated with climate change. Furthermore, partitioning the sample into country groups reveals that the magnitude and statistical significance of these effects are much greater in developing countries with weaker capacity to adapt to and mitigate the consequences of climate change.
Mr. Samir Jahjah
Depending on the preferences of the central bank, countries in a monetary union tend to accumulate less debt. This reduces the need for fiscal criteria such as debt ceilings. In a monetary union with an independent central bank and a sufficiently large number of relatively small members, investors will begin rationing credit to the government more rapidly, and an equilibrium with no inflation and no default exists. However, highly-indebted countries are more likely to default once they join a monetary union.
Mr. Nils O Maehle and Mr. Robert Dippelsman
The treatment of license payments in the national accounts has become increasingly important in recent years; with mobile phone licenses being auctioned for substantial values in several countries. Because the text of the System of National Accounts 1993 does not provide specific guidance on these licenses, their treatment needs to be decided on general principles. This paper concludes that there are usually two assets involved with mobile phone licenses, namely, the spectrum which is owned by the government, and the license which is an intangible nonproduced asset sold by the government to the licenseholder. The values of these two assets are linked complementarily. Alternative treatments of recording the license payments as sale of the spectrum itself, other taxes on production, production of a service, or rent, are considered and rejected. Methods of amortization of the license over its life are considered. An annex raises issues concerning the recognition of rights and obligations as assets and liabilities in national accounting.
Laurent Kemoe and Zaijin Zhan
This paper explores the effects of fiscal transparency on the borrowing costs of 33 emerging and developing economies (EMs), and on foreign demand for their sovereign debt. Using multiple indicators, including a constructed one based on the published data in the IMF’s Government Finance Statistics Yearbook, we measure the separate effects of the three dimensions of fiscal transparency: openness of the budget process, fiscal data transparency, and accountability of fiscal actors. The results suggest that higher fiscal transparency reduces sovereign interest rate spreads and increases foreign holdings of sovereign debt, with each dimension of fiscal transparency playing a different role. Availability of detailed cross-country comparable fiscal data, especially for balance sheet items, has shown to increase foreign investors’ willingness in holding EM sovereign debt.
Mr. Santiago Acosta Ormaechea
The public sector, in carrying out its operations, often incurs foreign currency denominated liabilities and, as such, is exposed to exchange rate fluctuations that could affect the value of public debt to GDP ratios over time. This paper shows that converting foreign currency denominated flows and stocks into local currency using the average and the end-of-period exchange rates, respectively, as envisaged in public finance manuals, gives rise to an identifiable stock-flow adjustment term—due to intra-year exchange rate fluctuations—that affects public debt accumulation. Importantly, the inclusion of this often-ignored stock-flow adjustment term is critical to accurately project public debt levels and any related indicator that could in turn inform about the risk of debt distress. Using a novel dataset covering 82 countries during 2008–19, the paper shows that this stock flow adjustment term is sizable in countries experiencing large exchange rate depreciations, namely above the 99th percentile of the full sample, reaching 1.2 percent of GDP. Interestingly, the measurement of policy-related concepts such as interest rate-growth differentials and debt stabilizing primary balances are also affected by intra-year exchange rate fluctuations, and in non-negligible ways.