Do financial markets reward government spending efficiency?

António Afonso, João Tovar Jalles, Ana Venâncio

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Article number101505
JournalJournal of International Financial Markets, Institutions and Money
Volume77
DOIs
Publication statusPublished - Mar 2022

Keywords

  • DEA
  • Government spending efficiency
  • Ordered probit (logit)
  • Panel analysis
  • Rating agencies
  • Sovereign ratings

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