Chapter 1: The sovereign debt issue of emerging market countries attracts extensive attention. A clearer picture of the governments’ fiscal stances helps us better understand the debt dynamics. We investigate if and how various types of the US monetary policy shocks, representing different types of global financial shocks, affect the fiscal stances of the EMEs. We apply a three-step approach. In the first step, we estimate the time-varying fiscal stances to both output and debt levels in the fiscal response function for 12 emerging countries using the Kalman filter method in a state-space model. Next, using pooled panel regressions, we examine the impacts of the US monetary policy shocks, in both conventional and unconventional fashion, on the fiscal stances of EMEs. We find that, first...[ Read more ]

Chapter 1: The sovereign debt issue of emerging market countries attracts extensive attention. A clearer picture of the governments’ fiscal stances helps us better understand the debt dynamics. We investigate if and how various types of the US monetary policy shocks, representing different types of global financial shocks, affect the fiscal stances of the EMEs. We apply a three-step approach. In the first step, we estimate the time-varying fiscal stances to both output and debt levels in the fiscal response function for 12 emerging countries using the Kalman filter method in a state-space model. Next, using pooled panel regressions, we examine the impacts of the US monetary policy shocks, in both conventional and unconventional fashion, on the fiscal stances of EMEs. We find that, first, it matters significantly the different types of shock, whether conventional or unconventional, for predicting the responses of fiscal stances of an EME government to the US MP shock. Secondly, countries in different states exhibit significant differences in fiscal stances facing the US monetary shocks. We also detect the phenomenon of policy coordination as we find that facing an expansionary conventional US monetary shock, a representative country with contractionary domestic monetary policy tends to pay less attention to its debt accumulation than it does with uncontractionary monetary policy, while keeping its counter-cyclical output stance unchanged across different domestic monetary policy states. In the last step, as an extension, we work out the country-specific impulse responsive functions of their fiscal stances to the US monetary shocks and find heterogeneities in countries’ responses to different types of shocks under different states. To the extent of response directions, we compare the country-specific fiscal stance responses with the country average and identify countries that do better than or worse than the country average under different states. These records help uncover the types of EMEs governments in terms of whether they are counter-cyclical and debt-restraining.

Chapter 2: We provide novel empirical evidence suggestive of signaling effects of sovereign borrowing on a country’s default risk. Using the S&P sovereign rating as a proxy for default risk, we find significant state-contingent effects of sovereign debt growth on a country’s rating, with the state being the country’s recent fiscal performance measured by its government operating balance. Conditional on a good fiscal state, higher sovereign debt growth significantly improves the sovereign rating, indicating a positive signaling effect of sovereign borrowing that more than compensates for its direct effect of increasing a country’s debt burden. Conditional on a poor fiscal state, higher debt growth significantly reduces the sovereign rating, even after the lagged rating, current government operating balance, sovereign bond yield, and other common determinants of sovereign rating are controlled for, which suggests a negative signaling effect of sovereign borrowing. We also provide a two-period model to rationalize these findings.