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Government Investment and Fiscal Stimulus-an IMF Working paper
October 14, 2010--Summary: Effects of government investment are studied in an estimated neoclassical growth model. The analysis focuses on two dimensions that are critical for understanding government investment as a fiscal stimulus: implementation delays for building public capital and expected fiscal adjustments to deficit-financed spending.
Implementation delays can produce small or even negative labor and output responses to increases in government investment in the short run. Anticipated fiscal adjustments matter both quantitatively and qualitatively for long-run growth effects. When public capital is insufficiently productive, distorting financing can make government investment contractionary at longer horizons.
Hedge Funds Saw August Inflows of $11.3B - TrimTabs/Barclays
October 14, 2010--The hedge-fund industry saw estimated inflows of $11.3 billion in August--the biggest inflow the industry has seen since February after about $3.1 billion of total redemptions in June and July--according to TrimTabs and Barclays.
"Hedge fund managers exhibited caution in August and it served them well," said Sol Waksman, founder and President of BarclayHedge. "The industry outperformed the market by a large margin. While the S&P 500 sank 4.7%, hedge funds posted a negative return of less than 1%."
Hedge-fund investors have gotten hungrier for risk, the firms said, and TrimTabs Executive Vice President Vincent Deluard said, "We suspect hedge-fund managers might invest aggressively in the current quarter" because "the fresh cash flowing into the industry needs to be put to work.
About one-third of managers are still sitting on a year-to-date return of less than 1%, and they'd need to end the year "with a bang" in order to collect performance fees, Deluard said.
A Perspective on Predicting Currency Crises-IMF Working paper
October 13, 2010--Currency crises are difficult to predict. It could be that we are choosing the wrong variables or using the wrong models or adopting measurement techniques not up to the task. We set up a Monte Carlo experiment designed to evaluate the measurement techniques.
In our study, the methods are given the right fundamentals and the right models and are evaluated on how closely the estimated predictions match the objectively correct predictions. We find that all methods do reasonably well when fundamentals are explosive and all do badly when fundamentals are merely highly volatile.
Bridging the Refinancing Cliff-Volume II
Slow Signs of Progress
October 13, 2010--Executive Summary
This special report provides an update on recent loan refinancing, “amend and extend” (A&E), and bond-for-loan takeout activity over the last nine months and their collective
impact on redistributing loan and bond maturities in the 2010?2015 time frame. Fitch Ratings’ key observations and findings are as follows:
Strong refinancing activity in the leveraged loan market coupled with record levels of high yield bond issuance has diminished a portion of leveraged loan debt that
matures over the next two years. However, limited progress has been made toward addressing the nearly $1.1 trillion of leveraged loans expected to mature between 2012 and 2014.
The rapid pace of A&E activity through the first nine months of 2010 has affected the shape of the refinancing “cliff” by decreasing loan maturities between 2010 and 2011. However, this has come at the expense of the steeper portion of the refinancing cliff as maturity totals have increased in 2012 through 2014. Fitch expects A&E volume to continue to increase through 2015 due to an increase in maturities during this period and increased willingness on the part of lenders. Fitch expects most extensions of 2013 and 2014 maturities will take place in 2011 and 2012. This activity should allow the market to redistribute loan maturities to a level more easily absorbed by traditional market sources.
New EDHEC Risk Institute research shows that without the use of robust estimators, minimising extreme risks may be worse than not minimising them
October 13, 2010--In recent research on advanced modelling for alternative investments*, supported by Newedge Prime Brokerage, EDHEC Risk Institute analysed whether portfolio selection techniques with a focus on extreme risks are truly superior to traditional return and risk analysis in situations when risk management matters most.
The results show that in trying to minimise extreme risk and make their risk evaluation more sophisticated, many asset managers increase the number of risk parameters to be estimated, which in turn leads to less robust and less relevant results than if they had stuck with a simple measure of portfolio volatility.
As outlined in the research, one key problem with explicitly introducing a focus on extreme risk in portfolio diversification techniques is that such techniques require estimates not only for variance-covariance parameters, but also for higher-order moments and comoments of the return distribution, the so-called coskewness and cokurtosis parameters, which describe how the portfolio constituents contribute to the overall fat-tailed and asymmetric distribution of the portfolio (skewness refers to the degree to which the distribution is skewed to the left or the right; kurtosis measures the “peakedness” of the distribution; a “fat tail” distribution is tilted towards the extremes). This is a formidable challenge that significantly exacerbates the dimensionality problem already present with mean-variance analysis.
Environmental taxation can spur innovation, says OECD
October 13, 2010--Governments could make better use of environmental taxes to discourage polluting activities and boost innovative ‘green technologies.’
“To achieve a greener future we need new technologies that can lower the cost of saving the planet,” says OECD Secretary-General Angel Gurría.
“Shifting part of the tax burden onto pollution makes it more attractive to develop and adopt these clean technologies and promotes green growth.”
OECD and many other governments already apply a range of taxes to energy, air and water pollutants and waste. Environmental taxes, along with tradable permit systems, are the most cost-effective and efficient environmental policy tool available. Citizens and industry react to green taxes by changing their behaviour, especially if government gives a strong signal that they intend to maintain tax rates and the price of carbon at high levels in the long-term.
view Taxation, Innovation and the Environment
CDS Spreads and Default Risk -Interpreting the Signals Fitch Report
October 12, 2010--Summary
Credit default swap (CDS) spreads, along with other market-based indicators such as bond and equity price information, have become prevalent tools for risk analysis. CDS spreads are updated frequently (e.g., daily) and reflect a market view on a credit, attributes which are potentially useful to the valuation of trading exposures, active portfolio management, and the assessment of funding conditions.
CDS spreads are also sometimes used in deriving estimates of a company’s default risk and, in turn, the calculation of regulatory and economic capital. When used in this context, it is important to note that CDS pricing can be driven by a number of factors not directly related to an entity’s fundamental creditworthiness, such as the leverage inherent in CDS trading, liquidity conditions, counterparty risk, and the risk aversion of market participants.
This study analyzes how CDS market volatility and directional momentum in spreads can affect their performance as indicators of default risk during a stress period. The research sample includes five U.S. sectors that experienced pronounced spread volatility during the crisis and encompasses more than 100 actively referenced entities (see the Appendix for full list of companies). Although the focus is on these five sectors, the study’s findings have broader applicability to the performance of spreads as default risk indicators in other sectors and regions (e.g., Europe).
Fitch’s research indicates that overall performance of CDS spreads during the crisis period has been mixed. For example, spreads on property-sensitive sectors started to widen rapidly during the latter part of 2007 (see graph below). Widening spreads proved to lead the severe distress that occurred among monolines, but generated false positives for homebuilders and real estate investment trusts (REITs), sectors that as a whole experienced relatively mild erosion in credit fundamentals.
FESE September Newsletter
October 12, 2010--The September FESE Newsletter is now available.
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New World Bank Survey: New Business Registration Dropped amid Global Financial Crisis
October 12, 2010-- New business registration dropped sharply in richer countries amid the global financial crisis, but didn’t change much in many lower-income countries, according to a new World Bank survey released today.
The trend in 2008-2009 was driven by the global financial crisis, which began in developed countries and hit them harder, according to The 2010 World Bank Group Entrepreneurship Snapshots. By contrast, new business registrations in many low-income countries, which were not as affected by the crisis, held up. That’s mainly because those countries tend to have lower rates of new business creation to begin with, and economic shocks there tend to bring smaller changes. It helped that some countries recently introduced new measures to modernize business registration.
“We are providing the first evidence that the recent financial crisis has caused a quick and sharp drop in the number of new registrations of limited-liability firms,” says Leora F. Klapper, who co-authored the report with Inessa Love, both senior economists at the World Bank’s Development Research Group. “The findings also suggest that more dynamic business registration occurs in countries that provide entrepreneurs with reduced red tape and a stable investment climate.”
From Stimulus to Consolidation: Revenue and Expenditure Policies in Advanced and Emerging Economies
October 12, 2010-Preface
An extraordinary global effort on fiscal and monetary policy has been
required to support economic activity in the wake of the Great Recession.
A key challenge now facing the world economy is to ensure that economic
growth resumes in a strong, sustained, and balanced way. As the recovery
becomes entrenched, policymakers will need to start reducing public debt
ratios to more prudent levels.
This paper by the Fiscal Affairs Department (FAD) aims to assist
International Monetary Fund (IMF) member countries in this endeavor by
providing a strategy for fiscal adjustment that can help support sustainable
growth over the longer term. It was presented at an IMF Executive Board
seminar in May 2010. It discusses a menu of specific revenue and spending
policy measures that could be considered to implement this strategy. On the
spending side, the paper suggests a two-pronged strategy focused on
stabilizing pension and public health spending ratios to GDP and reducing
other outlays, including public wages, untargeted social spending, and
subsidies. On the revenue side, particular attention is given to measures that
could raise revenues by reducing existing distortions in the tax system.
