Are Sovereign Defaults (Partly) Bad Luck?
When sovereigns default, the consequences can be disastrous. Domestic banks and companies often suffer alongside their governments, and the sovereigns themselves face high risks of re-defaulting. One contributor to default is often disappointing growth – examining a sample of defaults since 2000, growth has typically fallen short relative to independent forecasts made both one year and two years prior to default. Textual analysis of those errors finds regular attribution of this weak growth to exogenous shocks, beyond the control of the governments that default. This supports the hypothesis that, in part, sovereign defaults reflect bad luck. Finally, there are signs of a relationship between the extent of growth falling short of forecasts and the losses investors suffer in the event of default. Unsurprisingly, larger growth shortfalls are typically associated with higher losses.
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Was the Impact of COVID on UK GDP Real or Statistical?
The COVID-19 pandemic, and measures to fight it such as lockdowns, took a significant toll on economic activity around the world. In many instances, declines in GDP were the steepest on record, with the UK standing out among advanced economies. However, the extent of the downturn reflected not just the impact of the pandemic, but also the way that economic activity is measured. In particular, different countries adopt different approaches to measuring real government spending and output, and those differences had a significant impact during the pandemic. This article describes those broad differences in approach, and illustrates what UK activity estimates could have looked like if ONS estimates had followed the approach used for other European economies. Far from being the hardest hit of the five major European economies, the UK would actually have fared better than most under alternative measurement practices for GDP. This highlights the importance of how statistics are calculated, particularly for important economic data series, and cautions against just taking them as given.
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Did Rating Agencies Make the Euro Crisis Worse?
There is a commonly held belief that the euro debt crisis was exacerbated by a spiral of higher yields resulting from rating agencies downgrading euro area sovereigns, but there has been little formal analysis of this hypothesis. Data on ratings and market signals on credit can be made comparable by transforming market metrics into measures that correspond to the same rating scale, known as ‘market-implied ratings’. These signals can be based on bond yields, credit default swaps (CDS) or equity prices. The available data provide no consistent evidence that sovereign rating downgrades led to greater market stresses across so-called ‘peripheral’ euro-area countries. Sovereign ratings were relatively slow to react when the crisis erupted, compared with market signals, but there is also no evidence that they amplified the crisis in terms of triggering further increases in sovereign yields and CDS prices.
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Measuring Greek Debt: The Difference between Market and Credit Perspectives
It is likely to be several decades before data on government assets, off-balance sheet and contingent liabilities are consistently available across a wide range of countries. In the absence of data, GDP is a readily available scaling factor, but official sector agencies such as the IMF and private sector analysts recognise the insufficiency of debt–GDP ratios. Some commentators claim that, using international standards, Greek government debt could be only around 75% of GDP, compared with official figures of around 180%. Fundamentally, such discrepancies reflects debt valuation variations related to the difference between market risk and credit risk.
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Cultural Data Mirror International Structural Economic Differences
Data on cultural differences between countries based on the definitions developed by Geert Hofstede are now available for more than 80 countries. Data on six structural economic indicators published by the World Bank—ease of doing business, enforcement of contracts, control of corruption, government effectiveness, rule of law and political stability—are available for the same set of countries from 2000 onwards. Significant correlations between cultural factors and structural economic conditions suggest that differences across countries may persist for many years and that convergence is likely to be a very slow process. In Europe the single currency is a political project, but the extent to which cultural and structural economic differences remain suggests that the tail risk of euro fragmentation or break-up could persist for many years.
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The Political Limits of Independent Monetary Policy
Central banks in advanced economies have adopted a number of less conventional policy measures since the onset of the financial crisis and great recession. However, the efficiency of these measures remains highly uncertain; and, if downside risks crystallize, more radical approaches may be needed. In turn, that could force central banks to get explicit support from political authorities. As such, we may be near the political limits of independent monetary policy.
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The Economic Impact of Private Equity
Over the past half century, private equity has grown from a tiny part of the financial sector into a powerful industry, often controlling global brands. As the industry has grown, so too has academic interest in the sector. However, the vast majority of empirical research has focused on the impact of private equity at the microeconomic level, typically focusing on the experience of a pool of individual firms rather than the economy as a whole. As such, the analysis has tended to be partial in nature, rather than taking a general equilibrium approach. This article reviews evidence on the microeconomic impact of private equity, and examines whether these findings are visible in macroeconomic data. Across a pool of developed economies with significant private equity activity, there is no sign that private equity investment significantly boosts employment, productivity or hence growth at the macroeconomic level.
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Measuring UK Inflation: Practical Differences and Issues
Inflation is a key economic indicator that affects all economic agents. But the mechanisms by which price data are captured and aggregated are less uniform than might be expected, and there are a number of practical issues that can affect measured inflation rates. Focusing on UK data, this article examines the differing processes for measuring consumer prices, producer prices and other measures of inflation. It considers the data collection process at the microeconomic level, how sampling and aggregation methodologies vary, and the implications and impact that different averaging techniques can have on the same underlying data. It also discusses how the aggregation process can affect the time series properties of headline inflation.
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Quantitative Easing
Central banks around the world have moved to cut interest rates to record lows, with many in advanced economies going further and embracing full quantitative easing – creating new money to inject into the economy. This paper examines why quantitative easing has been necessary, and whether it is likely to result in higher demand or instead show up in higher inflation. Given the retrenchment in household spending, the risk is that quantitative easing has more impact on prices than output. And, with some first warning signs perhaps already evident in commodity markets, policymakers could face considerable difficulties unwinding the monetary stimulus.
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