Papers by Alessandro Missaley
Review of Law & Economics, 2016
We find strong evidence of country interdependence in the pricing of default risk, which suggests... more We find strong evidence of country interdependence in the pricing of default risk, which suggests that a crisis can easily propagate from countries with weak fiscal fundamentals to other fiscally sounder member States. Interest rate interdependence differs between countries with high interest rates – high yielders – and countries with low interest rates – low yielders –. The former countries are linked through global spreads; i. e. they are exposed to the interest rate spreads (over Germany) of other troubled countries to a degree which increases with fiscal proximity. Low yielders with sounder fiscal fundamentals are partially immune from the high interest rates of fiscally weak member States but are still exposed to the risk of a euro break-up that is priced in Quanto CDS. This “euro risk” factor is a main driver of the interest rate spreads of low yielders until August 2012. More importantly, our case study of Italy shows that the impact of the global spread variable is dominated...
In this paper we study how monetary policy, economic uncertainty and economic policy uncertainty ... more In this paper we study how monetary policy, economic uncertainty and economic policy uncertainty impact on the dynamics of gross capital inflows in the US. Particular attention is paid to the mixed frequency-nature of the economic time series involved in the analysis. A MIDAS-SVAR model is presented and estimated over the period 1988-2013. While no relation is found when using standard quarterly data, exploiting the variability present in the series within the quarter shows that the e↵ect of a monetary policy shock is greater the longer the time lag between the month of the shock and the end of the quarter. In general, the e↵ect of economic and policy uncertainty on US capital inflows are negative and significant. Finally, the e↵ect of the three shocks is di↵erent when distinguishing between financial and bank capital inflows from one side, and FDI from the other.
Sovereign debt management and fiscal vulnerabilities
SSRN Electronic Journal, 2005
This paper presents a simple model in which debt management stabilizes the debt-to-GDP ratio in f... more This paper presents a simple model in which debt management stabilizes the debt-to-GDP ratio in face of shocks to real returns and output growth and thus supports fiscal restraint in ensuring sustainability. The optimal composition of public debt is derived by looking at the relative impact of the risk and cost of alternative debt instruments on the cost of missing the stabilization target. The optimal debt structure is a function of the expected return differentials between debt instruments, of the conditional variance of their returns and of the conditional covariances of their returns with output growth and inflation. We then explore how the relevant covariances and thus the optimal choice of debt instruments depend on the monetary regime and on Central Bank preferences for output stabilization, inflation control and interestrate smoothing. Finally, we estimate the composition of public debt that would have supported debt stabilization in OECD countries over the last two decades. The empirical evidence suggests that the public debt should have a long maturity and a large share of it should be indexed to the price level. JEL Code: E63, H63.
Economic Modelling, 2019
This is a PDF file of an article that has undergone enhancements after acceptance, such as the ad... more This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of record. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article. Please note that, during the production process, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
Oxford Review of Economic Policy, 2015
We evaluate the benefits and costs of indexing multilateral loans to variables related to develop... more We evaluate the benefits and costs of indexing multilateral loans to variables related to developing countries' ability to pay; i.e. whether a reform of multilateral lending is feasible and economically justified. The analysis covers 40 IDA countries from 1990 to 2010 and focuses on three types of debt: GDP-indexed loans; export-indexed loans; inflation-indexed loans denominated in local currency. The insurance that indexed debt might offer against macroeconomic shocks depends on the conditional covariances of GDP growth, real exchange-rate depreciation and net exports that we estimate as the covariances of the forecast errors obtained from a VAR model. The analysis shows that both GDP-indexed loans and inflation-indexed local-currency loans would help to stabilize the debt ratio of the majority of IDA countries in our sample. However, the adverse policy incentives created by local currency debt tends to favor GDP-indexed debt. The cost of indexation would be small; the estimation of a CAPM suggests that loans indexed to GDP could be introduced at current interest rates since the estimated risk premium is less than one percent. Any additional risk for multilateral lenders would be more than offset by a lower frequency of debt crises.
A wide consensus has emerged on the role of debt management in reducing fiscal vulnerability by p... more A wide consensus has emerged on the role of debt management in reducing fiscal vulnerability by providing insurance against macroeconomic shocks to the government budget. Whether this goal is better accomplished by nominal or inflation-indexed debt, by a short or a long maturity structure, remains however controversial. In this paper we review the issues of indexation and debt maturity, discussing in particular the role of the maturity structure in light of integrated financial markets and the risk of default. We argue that the role of inflation-indexed debt as a hedge against demand and inflation shocks is less important when price stability is ensured by a Ricardian fiscal policy and an independent central bank. A strong case can instead be made for a long maturity structure to reduce interest-rate risk and, more importantly, the risk of default. The maturity of the debt is a key variable to assess the vulnerability of the government fiscal position and should deserve greater attention in debt sustainability analysis. Finally, we compare the theory of fiscal insurance to the debt managers' practice of minimizing the cost and risk of the interest expenditure. A concern for the cost of debt service is justified only if expected return differentials between debt instruments are determined by mispricing, market imperfections or liquidity, but not if higher risk premia reflect a fair price for insurance. Our analysis points to the danger of minimizing the interest expenditure over a short horizon as may happen in times of crisis, when the government strives to achieve budget balance. More generally, fiscal insurance cannot be evaluated using national accounts figures, such as the interest expenditure and the book value of the debt. The lack of a more theory-based accounting framework is indeed a major obstacle to optimal debt management.
Scandinavian Journal of Economics, 2002
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Fiscal Studies, 2011
EU New Member States must comply with the Stability and Growth Pact (SGP) and the investment requ... more EU New Member States must comply with the Stability and Growth Pact (SGP) and the investment requirements implied by the Lisbon Agenda. However, the SGP rules may result in underinvestment or distortions in the allocation of public expenditure. This paper provides new evidence on the effects of debt sustainability and SGP fiscal constraints on government expenditure in fixed capital, education and health in OECD countries by estimating government expenditure reaction functions to public debt and cyclical conditions. We find ...
European Economic Review, 2002
In this paper we study how monetary policy, economic uncertainty and economic policy uncertainty ... more In this paper we study how monetary policy, economic uncertainty and economic policy uncertainty impact on the dynamics of gross capital inflows in the US. Particular attention is paid to the mixed frequency-nature of the economic time series involved in the analysis. A MIDAS-SVAR model is presented and estimated over the period 1988-2013. While no relation is found when using standard quarterly data, exploiting the variability present in the series within the quarter shows that the effect of a monetary policy shock is greater the longer the time lag between the month of the shock and the end of the quarter. In general, the effect of economic and policy uncertainty on US capital inflows are negative and significant. Finally, the effect of the three shocks is different when distinguishing between financial and bank capital inflows from one side, and FDI from the other.
Economic Policy, Oct 1, 2003
We provide evidence that the movements in yield differentials between euro zone government bonds ... more We provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors-as measured by banking and corporate risk premiums in the United States-are more pronounced for bonds issued by Italy and Spain. Liquidity factors play a smaller role, so policies meant to increase financial market efficiency do not appear sufficient to deliver a 'seamless' bond market in the euro area. The risk of default is a small but important component of yield differentials movements, which signal market perceptions of fiscal vulnerability, impose market discipline on national fiscal policies, and may be reduced only by further convergence in debt ratios.
Scandinavian Journal of Economics, 2002
This paper examines public debt management during episodes of fiscal stabilization when long-term... more This paper examines public debt management during episodes of fiscal stabilization when long-term interest rates are generally higher than governments' expectations of future rates. We find that governments increase the share of fixed-rate long-term debt denominated in the domestic currency, the higher is the conditional volatility of short-term interest rates, the lower are long-term interest rates, and the stronger is the fall in long-term rates that follows the announcement of the stabilization program. This evidence suggests that governments tend to prefer long to short maturity debt because they are concerned about refinancing risk. However, when long-term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs.
Journal of International Money and Finance, 2013
We thank Doerte Doemeland, Andrea Presbitero, Maurice Shi¤ and Jivago Ximenes for helpful comment... more We thank Doerte Doemeland, Andrea Presbitero, Maurice Shi¤ and Jivago Ximenes for helpful comments and suggestions.
Fiscal Studies, 2011
EU New Member States must comply with the Stability and Growth Pact (SGP) and the investment requ... more EU New Member States must comply with the Stability and Growth Pact (SGP) and the investment requirements implied by the Lisbon Agenda. However, the SGP rules may result in underinvestment or distortions in the allocation of public expenditure. This paper provides new evidence on the effects of debt sustainability and SGP fiscal constraints on government expenditure in fixed capital, education and health in OECD countries by estimating government expenditure reaction functions to public debt and cyclical conditions. We find that, at high levels of debt, government capital expenditure and education expenditure are significantly reduced as the debt ratio increases in all OECD countries independently of EMU (or EU) membership. By contrast neither capital expenditure nor education expenditure is affected by the debt ratio in low debt countries. These findings are robust to the inclusion of the government deficit in the estimated reaction functions. Hence, it appears that EU countries have been constrained in their investment decisions more by the need to ensure debt sustainability than by the rules of the SGP. In low debt NMS countries public investment even increases with the debt ratio, a finding that is reassuring for their growth prospects. However, a less optimistic picture emerges when we focus on expenditures in public health and education, as it appears that NMS governments cut such expenditures -even at low levels of debt-as the deficit increases. Problems in controlling total expenditure together with the preventive arm of the SGP may have penalized investment in human capital in NMSs while leaving fixed capital investment unaffected.
This paper presents a simple model in which debt management stabilizes the debt-to-GDP ratio in f... more This paper presents a simple model in which debt management stabilizes the debt-to-GDP ratio in face of shocks to real returns and output growth and thus supports fiscal restraint in ensuring sustainability. The optimal composition of public debt is derived by looking at the relative impact of the risk and cost of alternative debt instruments on the cost of missing
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Papers by Alessandro Missaley