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Do financial markets reward government spending efficiency?

Antonio Afonso, Joao Jalles () and Ana Venâncio

Journal of International Financial Markets, Institutions and Money, 2022, vol. 77, issue C

Abstract: We provide a novel set of government spending efficiency scores for the OECD countries and then assess to what extent capital markets perceive government efficiency increases (decreases) as part of the determinants of sovereign rating decisions. Public efficiency scores are computed via data envelopment analysis. Then, we rely notably on ordered response models to estimate the response of sovereign ratings to changes in efficiency scores. Covering 35 OECD countries over the period 2007–2020, we find that increased public spending efficiency is rewarded by financial markets via higher sovereign debt ratings. In addition, higher inflation and government indebtedness lead to sovereign rating downgrades, while higher foreign reserves contribute to rating upgrades.

Keywords: Government spending efficiency; DEA; Panel analysis; Ordered probit (logit); Sovereign ratings; Rating agencies (search for similar items in EconPapers)
JEL-codes: C14 C23 E44 G15 H11 H50 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Do Financial Markets Reward Government Spending Efficiency? (2021) Downloads
Working Paper: Do Financial Markets Reward Government Spending Efficiency? (2021) Downloads
Working Paper: Do Financial Markets Reward Government Spending Efficiency? (2021) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:77:y:2022:i:c:s1042443122000014

DOI: 10.1016/j.intfin.2022.101505

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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