Do Financial Markets Reward Government Spending Efficiency?
REM Working Paper 0166-2021
36 Pages Posted: 23 Mar 2021
Date Written: March 20, 2021
We link governments’ spending efficiency scores, to sovereign debt assessments made by financial markets´, more specifically by three rating agencies (Standard & Poors, Moody´s and Fitch). 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 34 OECD countries over the period 2007-2018, 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
JEL Classification: C14, C23, E44, G15, H11, H50
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