04.03.2019 • 6/2019
New IWH publication takes stock: “United country – three decades after the Wall came down”
How is Germany’s economy faring 30 years after the fall of the Berlin Wall? A new publication by the Halle Institute for Economic Research (IWH) uses illustrative maps and graphs to show how the Federal Republic has developed compared to other countries and how economic unification has progressed. The publication presents many new findings, including on productivity differences between east and west, urban and rural development, as well as the availability of skilled labour.
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The Joint Dynamics of Sovereign Ratings and Government Bond Yields
Makram El-Shagi, Gregor von Schweinitz
Journal of Banking & Finance,
2018
Abstract
Can a negative shock to sovereign ratings invoke a vicious cycle of increasing government bond yields and further downgrades, ultimately pushing a country toward default? The narratives of public and political discussions, as well as of some widely cited papers, suggest this possibility. In this paper, we will investigate the possible existence of such a vicious cycle. We find no evidence of a bad long-run equilibrium and cannot confirm a feedback loop leading into default as a transitory state for all but the very worst ratings. We use a bivariate semiparametric dynamic panel model to reproduce the joint dynamics of sovereign ratings and government bond yields. The individual equations resemble Pesaran-type cointegration models, which allow for valid interference regardless of whether the employed variables display unit-root behavior. To incorporate most of the empirical features previously documented (separately) in the literature, we allow for different long-run relationships in both equations, nonlinearities in the level effects of ratings, and asymmetric effects in changes of ratings and yields. Our finding of a single good equilibrium implies the slow convergence of ratings and yields toward this equilibrium. However, the persistence of ratings is sufficiently high that a rating shock can have substantial costs if it occurs at a highly speculative rating or lower. Rating shocks that drive the rating below this threshold can increase the interest rate sharply, and for a long time. Yet, simulation studies based on our estimations show that it is highly improbable that rating agencies can be made responsible for the most dramatic spikes in interest rates.
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Alumni
IWH Alumni The IWH would like to stay in contact with its former employees. We...
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Jobs at IWH
Vacancies at IWH The Halle Institute for Economic Research (IWH) – Member of the Leibniz Association was founded in 1992. IWH’s tasks are economic research and science-based...
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East Germany
East Germany Rearguard Only investments in education will lead to a further catch-up ...
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Research Clusters
Four Research Clusters ...
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The Economic Development of Saxony-Anhalt since 1990
Oliver Holtemöller, Axel Lindner
IWH Discussion Papers,
No. 6,
2018
Abstract
This article describes the economic development of Saxony-Anhalt since 1990 in the context of the East German transition from a centrally planned economy to a market economy. In the early 1990s the economy of Saxony-Anhalt caught up quickly with West Germany, mainly because the capital stock was modernized and expanded. Convergence, however, has almost come to a halt for some time now and gross domestic product per employed person is still about 20% below the West German level. The challenge for economic policy is to further the catching-up process by fostering research and innovation and improving the skills of the workforce.
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Weigt
Who Buffers Income Losses After Job Displacement? The Role of Alternative Income Sources, the Family, and the State ...
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Heimpold (Interview)
What South Korea has to do with the IWH ... Gerhard Heimpold about his experiences...
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Publications
Optimizing Policymakers’ Loss Functions in Crisis Prediction: Before, Within or After? ...
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