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Content Analysis of the IMF Article IV Staff Reports for Euro Area Countries

Content Analysis of the IMF Article IV Staff Reports for Euro Area Countries. Lena Golubovskaja, NUIM April 14, 2011. IEA ANNUAL CONFERENCE. Outline. I ntroduction T heoretical Developments D ata and Methodology A nalysis of the Data C oncluding Remarks. Problem. The IMF’s Judgement.

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Content Analysis of the IMF Article IV Staff Reports for Euro Area Countries

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  1. Content Analysis of the IMF Article IV Staff Reports for Euro Area Countries Lena Golubovskaja, NUIM April 14, 2011 IEA ANNUAL CONFERENCE

  2. Outline • Introduction • Theoretical Developments • Data and Methodology • Analysis of the Data • Concluding Remarks

  3. Problem The IMF’s Judgement • In the United States “core commercial and investment banks are in a sound financial position, and systemic risks appear low” (IMF, 2007:14) • “Favorable global economic prospects, particularly strong momentum in the Euro area and in emerging markets led by China and India, continue to serve as a strong foundation for global financial stability…” (GFSR)

  4. EMU Fiscal Policies Was the miracle a ‘mirage’? • Some northern countries (Germany, Austria, the Netherlands) experienced competitiveness gains and accumulated huge external surpluses. • Some southern countries (Spain, Portugal, Greece) accumulated huge external deficits under imbalanced high growth strategies driven by strong negative real interest rates.

  5. Case Study: Ireland • Large transitory tax receipts used to fund tax cuts and permanent spending commitments • Budget surpluses were insufficiently large • Excessive current spending growth • Narrowed tax base • Policy stance was inappropriately procyclical

  6. Deterioration in Fiscal Positions: EU Members, 2007-09 IRE IRE LAT LAT UK UK ESP ESP Chart plots change in budget balance (x-axis) and in gross debt (y-axis), as % of GDP between 2007 and 2009. Source: Public Finances in EMU, EC 2009

  7. Theoretical Developments Textual analysis using computer algorithms Economic implications of the external policy reports • The accuracy of information (Batchelor, 2001) • Pellechio and Cady (2005) • Corporate earnings releases (Rogers at al., 2009) • Accounting policy disclosures (Levine and Smith, 2006) • Multiple sources of financial text (Kothari, Li, and Short, 2008) • Asymmetric Effect of the Beige Book Language (Armesto et al., 2006)

  8. Content Analysis ‘Anecdotical’ Evidence: Opinions of the IMF executive Board, Ireland • “The continued impressive performance of the Irish economy, which is based on sound economic policies, provides useful lessons for other countries” (2004) • “Impressive performance is due in significant measure to sound economic policies, including prudent fiscal policies… The housing market is likely headed for a soft landing, but there is a risk of a sharp decline.” (2005) • “A number of directors, however, saw less merit in fiscal tightening at the current juncture, pointing to the need for further increases in spending to achieve social goals” (2006) • “The directors commended Ireland’s continued impressive economic performance. this performance has been underpinned by outward-oriented policies, prudent fiscal policy, low taxes and labour market flexibility” (2007)

  9. Concerns/Risk Factors Identified by IMF (IV), Ireland *Author calculations Limitations

  10. Content Analysis DICTION 5.0 • Dictionary-based program that counts types of words most frequently encountered in contemporary American public discourse and is designed to capture the linguistic style. • Uses 10,000 search words assigned to 35 theoretically-based linguistic categories to characterize text on several dimensions. • Advantages: pre-existing search rules, efficient analysis of large number of text, partial correction for the context. • Disadvantage: assumes that higher frequency usages of a word or phrase mean the concept is more meaningful.

  11. Content Analysis DICTION 5.0: thematic categories and sub-categories

  12. Content Analysis DICTION 5.0: Hardship Dictionary • Bias, Corrupting, Crime, Crises, Deficit, Depress, Deteriorate, Difficulties, Distress, Disturbance, Folly, Problem, Recession, Risk, Shock, Weakness, Worry, Worse…

  13. Data and Methodology Data • 16 euro area countries • Staff Reports,IV (2005-2007) • Executive Board Assessments , PIN (2005-2007) Sample construction • Only textual part of the documents

  14. Validation of WARNING measure Case of U.S., Staff Reports (IV) Mean of 5.86 and standard deviation of 4.64 based on 122 runs of a variety of financial news stories.

  15. WARNING: Euro Area

  16. WARNING, Staff Reports Insignificantly different results for Finland, France, Germany, Ireland, the Netherlands, and Slovakia Average WARNING scores for the euro area: Staff Reports, 2005-2007

  17. Did WARNING score change over time for EMU? Staff Reports, 1999-2009

  18. WARNING, Staff Reports WARNING for Ireland is not statistically different from the euro area averages only for the years 2002, 2003, and 2006

  19. Summary • Do not allow editing by member-country • The language of surveillance needs to be unambiguous • More weight on analysis, less on diplomacy: strengthen the role of staff/secretariat. • Standard-based approach for staff interactions.

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