At Economist’s View, Mark Thoma draws attention to a recent paper that uses financial markets data to infer a market prediction of the likely effectiveness of the U.S. government’s ‘Surge’ strategy in Iraq.
In “Is The ‘Surge’ Working? Some New Facts“, MIT’s Michael Greenstone writes:
This paper shows how data from world financial markets can be used to shed light on the central question of whether the Surge has increased or diminished the prospect of today’s Iraq surviving into the future. In particular, I examine the price of Iraqi state bonds, which the Iraqi government is currently servicing, on world financial markets. After the Surge, there is a sharp decline in the price of those bonds, relative to alternative bonds. The decline signaled a 40% increase in the market’s expectation that Iraq will default. This finding suggests that to date the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it.
(HT to Alex Tabarrok at Marginal Revolution.)
