infonet-economy

We narrate Ireland's recent odyssey from the pride and envy of Europe to kneeling supplicant through the eyes of an econometric model of the government bond market. The exercise suggests that, in essence, two developments triggered and propelled Ireland's drift towards sovereign default: first, the global financial crisis that drove Ireland into a severe recession with collapsing tax revenues and increasing unemployment; second, a gap between the post-2007 increase in sovereign default risk that can actually be linked to macroeconomic fundamentals and the much bigger increase in perceived risk reflected by high interest rates and communicated by the massive downgrades of Ireland's sovereign debt rating.

[http://ideas.repec.org/p/usg/econwp/201321.html Volltext herunterladen]

This learning package brings the macroeconomic implications of financial crises to the undergraduate classroom. It equips even apprentices of macroeconomics with tools enabling them to be active and constructive participants in discussions of the current crisis. It should also encourage undergraduate instructors to use the 2007 subprime crisis and its global effects as an extended case study, emphasizing the applied nature of macroeconomics and its potential to make developments and policy discussions in the real world more transparent.

The package assumes familiarity with two workhorses of the undergraduate curriculum: the IS-LM and the Mundell-Fleming model. Extending textbook versions of these models, it shows how the emergence of financial crises, defined as deteriorations of confidence that lead to increasing risk premiums, affects money markets (via the LM curve) and capital markets (via the IS curve).

Starting with an empirical comparison of key macroeconomic variables during the Great Depression of 1929-1933 and the current crisis, users then enter the interactive segment of the package. The Java applet that sits at the heart of this central section features a crisis version of the Mundell-Fleming model (to represent a small open economy) that is connected to a likewise modified IS-LM model (to represent the rest of the world).

After being cautioned that financial crises come in many shapes (depending on the exchange rate sys-tem, on whether they erupt in the banking or corporate sector, at home or abroad) students may expe-riment with a variety of crises, experiencing their macroeconomic repercussions, and gaining hands-on experience as central bankers and government policy makers. This way students find out under what conditions financial crises threaten to generate major recessions, when textbook policy recom-mendations work or are turned upside down, and what kind of financial crises may even destabilize the economy with the prospect of an outright depression.

[http://www.fgn.unisg.ch/eurmacro/xercises/crisis.html Link zum interaktiven Lernpaket / link to the interactive package]

An online survey among undergraduate macroeconomics instructors reveals that roughly half of them were scared when the crisis erupted and remain wary that more may be in the offing. As regards teaching, courses feature much the same lineups of models as they did before the crisis. A striking change concerns public debt dynamics, which receives much more emphasis. Regarding the finer fabric of undergraduate macro teaching, exciting things are going on. A host of topics related to financial markets has entered the curriculum, and there is more interest in economic history, the history of economic thought and case studies.

[http://ideas.repec.org/p/usg/econwp/201120.html Volltext herunterladen]

The Great Recession raised questions of what and how macroeconomists teach at academic institutions around the globe, and what changes in the macroeconomics curriculum should be made. The authors conducted a survey of undergraduate macroeconomics instructors affiliated with colleges and universities in Europe and the United States at the end of 2010. The results show that courses feature very much the same lineups of models as they did before the crisis. A notable exception concerns public debt dynamics, which receives considerably more emphasis. The finer fabric of undergraduate macroeconomics teaching, however, shows substantial shifts: a host of topics related to financial markets has entered the curriculum, and there is more interest in economic history, the history of economic thought and case studies.

[http://ideas.repec.org/p/usg/econwp/201120.html Link zum zugrunde liegenden Diskussionspapier]

This paper asks whether rating agencies played a passive role or were an active driving force during Europe's sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equ-ations to decompose actual ratings into systematic and arbitrary components that are not explained by observed previous procedures of rating agencies. Next, we check whether both systematic and arbitrary parts of credit ratings affect credit spreads. We find that both do, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecy that may drive even relatively healthy countries towards default.

[http://ideas.repec.org/p/usg/econwp/201106.html#abstract
Volltext herunterladen]

This paper asks whether rating agencies played a passive role or were an active driving force during Europe's sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equations to decompose actual ratings into systematic and arbitrary components that are not explained by previously observed procedures of rating agencies. Finally, we check whether systematic, as well as arbitrary, parts of credit ratings affect credit spreads. We find that both do affect credit spreads, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecies that may drive even relatively healthy countries towards default.

(A Working Paper Version is available at [http://ideas.repec.org/p/usg/econwp/201106.html http://ideas.repec.org/p/usg/econwp/201106.html])

Erstfassung des im
Wirtschaftsdienst (2012), Heft 4, S. 251-255 unter dem Titel
Die Macht der Meinungsmacher:
Ratingagenturen und staatliche Verschuldungsdynamiken
erschienenen Beitrags.

Die Finanzmärkte reagieren in der gegenwärtigen Staatsschuldenkrise offensichtlich auf Meinungsäusserungen der marktbeherrschenden Ratingagenturen - selbst wenn diese in scheinbarem Widerspruch zur vorherigen Bewertung ökonomischer Fundamentaldaten stehen. Das führt dazu, dass privatwirtschaftliche Interessen staatliche Verschuldungsdynamiken und damit den Handlungsspielraum der Politik beeinflussen können.

Eine Erstfassung dieses Artikels ist unter dem Titel
Die Macht der Meinungsmacher:
Wie Ratingagenturen staatliche Verschuldungsdynamiken beeinflussen (können)
auf der Diskussionsplattform Ökonomenstimme erschienen

[http://www.oekonomenstimme.org/artikel/2012/08/die-macht-der-meinungsmac... Link zur auf Ökonomenstimme publizierten Version]

We explore whether experiences during Europe's sovereign debt crisis support the notion that governments faced scenarios of self-fulfilling prophecy and multiple equilibria. To this end, we provide estimates of the effect of interest rates and other macroeconomic variables on sovereign debt ratings, and estimates of how ratings bear on interest rates. We detect a nonlinear effect of ratings on interest rates which is strong enough to generate multiple equilibria. The good equilibrium is stable, ratings are excellent and interest rates are low. A second unstable equilibrium marks a threshold beyond which the country falls into an insolvency trap from which it may only escape by exogenous intervention. Coefficient estimates suggest that countries should stay well within the A section of the rating scale in order to remain reasonably safe from being driven into eventual default.

[http://ideas.repec.org/p/usg/econwp/201215.html Volltext herunterladen]