IDEAS home Printed from https://ideas.repec.org/p/tcb/wpaper/0807.html
   My bibliography  Save this paper

Tangos, Sambas or Belly Dancing? Or, do Spreads Dance to the Same Rhythm? Signaling Regime Sustainability in Argentina, Brazil and Turkey

Author

Listed:
  • Santiago Herrera
  • Ferhan Salman

Abstract

This paper examines the role of primary fiscal balances as a signaling device in a world in which investors are uncertain about the sovereign�s commitment to honor its obligations. Based on the Drudi-Prati model that rationalizes delayed stabilization and debt accumulation, we verify the existence of a rating (sovereign spreads) function that depends negatively (positively) on the debt ratio and negatively (positively) on the primary balance. This relationship, however, is non-monotonic and is conditioned on a threshold debt level. At low debt levels, the primary balance has an ambiguous relationship with sovereign spreads, but as debt increases, the primary balance�s effect on spreads is magnified. Beyond a given threshold, the committed sovereign has the incentive to tighten fiscal policy, while the weak government does not. Using data for Argentina, Brazil, and Turkey, for the period 1994-2007, we show that during their most recent crises, Brazil and Turkey can be characterized as dependable (in Drudi-Prati�s terminology), while Argentina�s incentives to use the primary balance in the late nineties were not as determinant. The explanatory power of the model improves by allowing heteroskedasticity in the shocks to each country and heterogeneity across countries in the coefficient estimates. Hence, though spreads react to debt levels and to primary balances in these countries, they do so with different intensity.

Suggested Citation

  • Santiago Herrera & Ferhan Salman, 2008. "Tangos, Sambas or Belly Dancing? Or, do Spreads Dance to the Same Rhythm? Signaling Regime Sustainability in Argentina, Brazil and Turkey," Working Papers 0807, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  • Handle: RePEc:tcb:wpaper:0807
    as

    Download full text from publisher

    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2008/08-07
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 949-963.
    2. Carlo A. Favero & Francesco Giavazzi, 2004. "Inflation Targeting and Debt: Lessons from Brazil," NBER Working Papers 10390, National Bureau of Economic Research, Inc.
    3. repec:bla:jecsur:v:11:y:1997:i:3:p:235-65 is not listed on IDEAS
    4. S. Rao Aiyagari, 1988. "Economic fluctuations without shocks to fundamentals; or, does the stock market dance to its own music?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Win), pages 8-24.
    5. Alessandro Missale, 1997. "Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-265, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Murat Taşdemir & Abdullah Yalama, 2014. "Volatility Spillover Effects in Interregional Equity Markets: Empirical Evidence from Brazil and Turkey," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(2), pages 190-202, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ngan Tran, 2019. "Asymmetric effects of fiscal balance on monetary variables: evidence from large emerging economies," Empirical Economics, Springer, vol. 57(3), pages 1045-1076, September.
    2. Helder Ferreira de Mendonça & Marcio Pereira Duarte Nunes, 2011. "Public debt and risk premium," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 38(2), pages 203-217, May.
    3. Gerardo Manzo & Antonio Picca, 2020. "The Impact of Sovereign Shocks," Management Science, INFORMS, vol. 66(7), pages 3113-3132, July.
    4. Fatih Ozatay, 2008. "Expansionary Fiscal Consolidations: New Evidence from Turkey," Working Papers 0805, TOBB University of Economics and Technology, Department of Economics.
    5. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    6. Andres, Javier & Domenech, Rafael & Fatas, Antonio, 2008. "The stabilizing role of government size," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 571-593, February.
    7. Perego, Erica, 2020. "Sovereign risk and asset market dynamics in the euro area," Journal of International Money and Finance, Elsevier, vol. 109(C).
    8. Manuel Funke & Moritz Schularick & Christoph Trebesch, 2023. "Populist Leaders and the Economy," American Economic Review, American Economic Association, vol. 113(12), pages 3249-3288, December.
    9. Creel, Jerome & Bihan, Herve Le, 2006. "Using structural balance data to test the fiscal theory of the price level: Some international evidence," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 338-360, June.
    10. Leeper, Eric M. & Yang, Shu-Chun Susan, 2008. "Dynamic scoring: Alternative financing schemes," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 159-182, February.
    11. İbrahim Özmen & Mihai Mutascu, 2024. "Public Debt and Growth: New Insights," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 8706-8736, June.
    12. Tobias Hagen, 2010. "Effects of parliamentary elections on primary budget deficits in OECD countries - robustness of the results with regard to alternative econometric estimators," Applied Economics Letters, Taylor & Francis Journals, vol. 17(2), pages 135-139, January.
    13. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    14. Christian Schoder, 2014. "The fundamentals of sovereign debt sustainability: evidence from 15 OECD countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(2), pages 247-271, May.
    15. Jarociński, Marek & Maćkowiak, Bartosz, 2018. "Monetary-fiscal interactions and the euro area's malaise," Journal of International Economics, Elsevier, vol. 112(C), pages 251-266.
    16. António AFONSO & Priscilla TOFFANO, 2013. "Fiscal regimes in the EU," Working Papers of Department of Economics, Leuven ces13.06, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    17. Borgersen, Trond-Arne & King, Roswitha M., 2014. "Structural origins of debt-sustainability in mature and transition economies: Domar, Balassa–Samuelson and Maastricht," Structural Change and Economic Dynamics, Elsevier, vol. 30(C), pages 101-119.
    18. Ashraf, Quamrul & Gershman, Boris & Howitt, Peter, 2017. "Banks, market organization, and macroeconomic performance: An agent-based computational analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 143-180.
    19. Hagen, Tobias, 2013. "Impact of national financial regulation on macroeconomic and fiscal performance after the 2007 financial stock: Econometric analyses based on cross-country data," Working Paper Series 02, Frankfurt University of Applied Sciences, Faculty of Business and Law.
    20. António Afonso & José Alves & Oļegs Matvejevs & Oļegs Tkačevs, 2023. "Fiscal Sustainability and the Role of Inflation," CESifo Working Paper Series 10843, CESifo.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tcb:wpaper:0807. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sermet Pekin or Ilker Cakar or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/tcmgvtr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.