Financial Markets and Public Finance

Transcription

1 Neue Studien zur Politischen Ökonomie 10 Erik R. Fasten Financial Markets and Public Finance Sovereign Risks, Credit Markets and Fiscal Federalism Nomos

2 Die Reihe Neue Studien zur Politischen Ökonomie wird herausgegeben von Prof. Dr. Charles B. Blankart Prof. Dr. Reiner Eichenberger Prof. Dr. Lars P. Feld Prof. Dr. Dr. h.c. mult. Bruno S. Frey Prof. Dr. Gebhard Kirchgässner Prof. Dr. Dr. Christian Kirchner Prof. Dr. Dr. h.c. mult. Friedrich Schneider Prof. Dr. Alois Stutzer Prof. Dr. Hannelore Weck-Hannemann Band 10

3 Erik R. Fasten Financial Markets and Public Finance Sovereign Risks, Credit Markets and Fiscal Federalism 2.Auflage Nomos

4 Gedruckt mit Unterstützung des Förderungs- und Beihilfefonds Wissenschaft der VG Wort. Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über abrufbar. Die Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the Internet at Zugl.: Berlin, Humboldt-Univ., Diss., 2010 ISBN Auflage 2012 Nomos Verlagsgesellschaft, Baden-Baden Printed in Germany. Alle Rechte, auch die des Nachdrucks von Auszügen, der fotomechanischen Wiedergabe und der Übersetzung, vorbehalten. Gedruckt auf alterungsbeständigem Papier. This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically those of translation, reprinting, reuse of illustrations, broadcasting, reproduction by photocopying machine or similar means, and storage in databases. Under 54 of the German Copyright Law, where copies are made for use other than private use, a fee is payable to»verwertungsgesellschaft Wort«, Munich.

5 Contents 1 Introduction 17 2 Sudden Death or Glorious Convalescence: Risk Transfers, Cross-country Spillovers and Sovereign Defaults Introduction Related Literature Theoretical Motivation Fiscal Positions and Default Risks Cost of public debt in the euro area Market-based implicit default probabilities Channels of Risk Transfers Primary data set Risk transfer from the private to the public sector Cross-country spillovers Implications of the results Conclusion 44 3 On the Sustainability of sub-national Government Finance A Panel Data Approach Introduction Theoretical Concepts and Related Literature Role of Public Debt Devolution tendencies Institutions to contain indebtedness Empirics Data Description Econometric Models and Results Static Analysis Dynamic Analysis 69 9

6 3.4 Application to Germany Conclusion 75 4 Two-sided Certification: The market for Rating Agencies Introduction Related literature The Setup Optimal behaviour of a monopolistic certifier The market without the certifier One-sided certification Comparison of one-sided certification Two-sided certification Application to the Rating Market Conclusion The Fiscal-Financial Transmission Channel: Asset pricing in Germany Introduction Related Literature Taxation Construction of the Effective Marginal Tax Rate Application to the German Tax System Effective Marginal Tax rate in Germany Empirics Macroeconomic Environment Estimations and results Results and Transmission channel Conclusion Conclusion and Discussion 127 A Appendix: Sudden Death or Glorious Convalescence: Risk Transfers, Cross-country Spillovers and Sovereign Defaults 133 A.1 Computation of market-implied default probabilities

7 A.2 Stylised sovereign balance sheet 134 A.3 Sources of risk for the public balance sheet 135 A.4 Financial market rescue measures: Direct impact 136 A.5 Financial market rescue measures: Contingent liability 137 A.6 Risk-neutral default probabilities compared to rating assignments 138 A.7 Standard deviation of default probabilities of selected Euro area countries 139 A.8 Key variables applied in the panel estimations 139 A.9 Exposure of banks in sample countries 140 B Appendix: On the Sustainability of sub-national Government Finance APanel Data Approach 143 B.1 Institutional rules and deficits 143 B.2 Empirical results 144 C Appendix: Two-sided Certification: The market for Rating Agencies 145 C.1 Summary results 145 C.2 Appendix Proofs 146 C.2.1 Proof of Proposition C.2.2 Proof of Lemma C.2.3 Proof of Lemma C.2.4 Proof of Proposition C.2.5 Proof of Lemma C.2.6 Proof of Lemma C.2.7 Proof of Lemma C.2.8 Proof of Proposition C.2.9 Proof of Corollary C.2.10 Proof of Lemma C.2.11 Proof of Lemma C.2.12 Proof of Lemma C.2.13 Proof of Lemma C.2.14 Proof of Proposition

8 D Appendix: The Fiscal-Financial Transmission Channel: Asset pricing in Germany 153 D.1 Construction of the effective tax rate 153 D.2 Differences of the imputation systems: full imputation system 154 D.3 Differences of the imputation systems: half income system 155 D.4 Sources of variables 156 D.5 Price-Earnings Ratios in Selected Countries 157 Bibliography

9 List of Figures 2.1 Public debt in selected OECD countries Sovereign yield spreads over German bund between 1 July 2007 and 31 August Budget balance and sovereign yield spreads during the crisis Potential spillovers to public balance sheets General government gross financial liabilities in selected advances economies from 1970 to Devolution tendencies in selected OECD countries between ) ) Deficit per revenue ratio for all countries from 1980 to Sovereign debt and deficits in Germany between 1970 and Market outcomes without a certifier Quality threshold q Profit shares with one-sided seller-certification Difference of seller segmentation with one- and two-sided certification Profit shares with two-sided certification compared to one-sided Transmission Channels of Fiscal Policy Investors, Institutions and Asset Prices The Size of the States Shareholder Structure in Germany between 1972 and Marginal income Tax Rates in Germany between 1958 and 2005 shareholder structure in Germany between 1972 and Shareholder Structure in Germany between 1972 and Effective Marginal Tax Rate in Germany Economic Environment in Germany between Cointegration Graph

10 List of Tables 2.1 Historical recovery rates of selected sovereigns Default Probabilities derived from bonds spreads Static estimation results: Transfer of private risks Dynamic estimation results: Transfer of private risks Static estimation results: Cross-country spillovers Dynamic estimation results: Cross-country spillovers Summary Statistics Classification of Institutional Differences Empirical results for OLS and GLS Bidding behavior of buyers with seller-certification Bidding behavior for the case of two-sided certification Moody s yearly revenues and revenue shares depending on sales scheme Overview on the variation of the corporate income tax in Germany Results of Unit root tests Granger-Causality-Test for the effective marginal tax rate and price-earnings (price-dividend) ratios Cointegration Test Results for Price-Earnings Ratio (Maximum Eigenvalue) Cointegration Test Results for Price-Earnings Ratio (Trace) Normalised Johansen Cointegrating Coefficients; Stock response to innovations in macro variables