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I document that government debt is related to risk premia in various asset markets: (i) the debt-to-GDP ratio positively predicts excess stock returns with out-of-sample R 2 up to 30% at a five-year horizon, outperforming many popular predictors; (ii) the debt-to-GDP ratio is positively correlated with credit risk premia in both corporate bond excess returns and yield spreads; (iii) higher debt-to-GDP ratio is associated with lower real risk-free rates, (iv) higher debt-to-GDP ratio corresponds to lower average expected returns on government debt; (v) debt-to-GDP ratio positively comoves with fiscal policy uncertainty. I rationalize these empirical findings in a general equilibrium model featuring recursive preferences, endogenous growth, distortionary taxation, and time-varying fiscal uncertainty. In the model, the tax risk premium is sizable and its time variation is driven by fiscal uncertainty. Furthermore, the model generates an endogenous relationship between the debt-to-GDP ratio and fiscal uncertainty. Fiscal uncertainty increases debt valuation through lower government discount rate. This mechanism is reinforced as higher debt conversely raises uncertainty because of future fiscal consolidations.

Udgivelsesdato: SEP This empirical study of the exchange rate exposure management of Danish non-financial firms listed on the Copenhagen Stock Exchange shows that debt denominated in foreign currency (foreign debt) is a very important alternative to the use of currency derivatives. The results show that the relative importance of foreign debt is positively related to (1) the extent of foreign subsidiaries, (2) the relative value of assets in place, and (3) the debt ratio. The pivotal role of time horizon is emphasised. These findings are important to firms in other countries with open economies.

We offer a model and evidence that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. The model, in the spirit of Black and Cox (1976), implies that the recovery rate at emergence from bankruptcy on all of the firm's debt taken together is increasing in the pre-bankruptcy share of private debt in all debt. Empirical evidence supports this and other implications of the model. Indeed, debt composition has a more economically material empirical influence on recovery than all other variables we try taken together.

This paper offers an empirical analysis of how public and private debt jointly influence economic growth. We consider the endogeneity and interlink of two debt variables which are subject to regime switch in a dynamic panel data model. Using data from 29 OECD countries, the threshold effect of the interaction of the public and private debt on economic growth is found to be negative and significant when the aggregate debt to GDP ratio reaches 220%, beyond which the marginal effect of public (or private) debt further increases on top of the non-interactive effect. It is shown that the true effect of individual debt is largely underestimated if the interactive effect is omitted. We also decompose private debt into household and corporate debt and show that the public–private debt interaction is likely operating through the channels of household debt and public debt. We examine the robustness of the threshold effects to banking crises, output volatility, institutional quality, tax, private and public pension savings, participation rate as well as potential outliers.

We introduce long-term debt and a maturity choice into a dynamic model of production, firm financing, and costly default. Long-term debt saves roll-over costs but increases future leverage and default rates because of a commitment problem. The model generates rich distributions of maturity choices, leverage ratios, and credit spreads across firms. It explains why larger and older firms borrow at longer maturities, have higher leverage, and pay lower credit spreads. Firms' maturity choice matters for policy: A financial reform which increases investment and output in a standard model of short-term debt can have the opposite effect in a model with short-term debt and long-term debt.

The paper criticizes the so-called Ricardian Equivalence (RE) and its implications for the analysis of the problem of the public debt. The RE hinges on a view of the economic role of the state as merely parasitic and on an unwarranted extension of the micro-economic analysis of debts to the macro-economic level. The RE is at the heart of the mainstream approach to the public debt and the policies that indicate the running of primary surpluses as the only way to stabilize its ratio to GDP. The paper suggests a different ‘non-Ricardian’ approach in which the state is not a mere parasite. The government, by restructuring its expenditure, can contribute to raise the economy’s rate of growth and ensure a stable and sustainable ratio of the public debt to GDP, without necessarily running primary surpluses.

Although the impact of renewable energy consumption on human development has been investigated in previous studies, the results are inconsistent. In addition, public debt can directly or indirectly affect human development and renewable energy consumption. However, studies examining the moderating role of public debt in the relationship between renewable energy consumption and human development are lacking. Our research seeks to fill this gap by examining whether public debt is a factor that moderates the nexus between the renewable energy consumption and human development of BRICS countries in the period 1990–2016. By employing a set of methods that can help solve the issue of cross-sectional dependence, such as the Westerlund panel cointegration test, Driscoll-Kraay robust standard errors estimates, and Dumitrescu-Hurlin causality test, the empirical results indicate that human development is stimulated by the use of renewable energy. In contrast, public debt is harmful to human development. Similarly, the interaction term between renewable energy usage and public debt is confirmed to reduce human development. Moreover, bidirectional causality exists between human development and renewable energy consumption. Our findings suggest that BRICS countries should encourage the use of renewable energy and control the ratio of public debt to GDP at an appropriate rate.

This paper argues that a deeper integration of capital markets in the European Union is necessary to support accelerated economic growth. Further integrated equity and bond markets will provide access to capital funding improve the allocation of capital, help mitigate market and systemic risks, and ultimately foster a counter-cyclical, sustained real economy growth. The paper provides evidence that the increases in both total portfolio equity and debt to GDP ratios in the euro area actively contribute to real GDP growth.

This paper is a study of the financing actions by firms to adjust leverage: debt reductions, stock sales, debt issues, and stock purchases. Each type of action is positively autocorrelated. The standard empirical models of corporate leverage produce leverage targets that do not correctly predict actual debt issues and stock sales. Firm-specific time-series regressions with the logarithm of firm assets and market-to-book as regressors, correctly predict these patterns. The estimates imply that on average firms adjust toward their target much faster than generally understood, closing about half of the leverage gap in a year.

We empirically investigate the impact of government debt on corporate financing decisions in an international setting. We show a negative relation between government debt and corporate leverage using data on 40 countries between 1990–2014. This negative relation is stronger for government debt that is financed domestically, for firms that are larger and more profitable, and in countries with more developed equity markets. To address potential endogeneity concerns, we use an instrumental variable approach based on military spending and a quasi-natural experiment based on the introduction of the Euro currency. Our findings suggest that government debt crowds out corporate debt.

This paper develops an overlapping generations model with debt-financed public investment. The model assumes that government is subject to the golden rule of public finance and that households are finitely lived in the sense of Yaari–Blanchard. It is shown that the growth-maximizing tax rate is not equivalent to the welfare-maximizing one; in addition, both tax rates are lower than the output elasticity of public capital. This paper also derives the threshold value of public debt to GDP ratio that maximizes the equilibrium growth rate and social welfare, i.e., the inverted-U relation between the public debt to GDP ratio and the economic growth rate suggested by empirical studies. Furthermore, this paper shows that both tax rates and the public debt to GDP ratio positively depend on longevity. This result provides a possible explanation for the rising tendency of the public debt to GDP ratio under population aging in countries such as the United Kingdom, Germany, and Japan.

In this study, structural vector autoregression (SVAR) models are used to analyze the asymmetric effects of external and internal economic factors on the exchange market pressure index (EMPI) in the Czech Republic, Iceland, Poland, and Russia. Along with the forecast error variance decompositions (FEVDs) of the SVAR models and slope-based asymmetry tests suggesting that there may be asymmetric effects on EMPI, impulse response functions (IRFs) of SVAR models for the Czech Republic and Poland indicated that improvements in the current account balance will reduce the exchange market pressure (EMP), whereas deterioration of the current account balance may create a more serious speculative attack potential in Iceland and Poland, due to the high ratio of debt to GDP. Changes in inflation may have significant asymmetric effects on the EMP; more precisely, it was found that high inflation and the interest rate environment will increase the pressure on the exchange rate in all four economies. My findings indicate that decreases in inflation rates did not reduce the EMPI in Iceland and Russia, whereas the decline in interest rates did not constitute the necessary environment for capital inflows in any of the four countries. It is also implied that, due to the changes in long-term interest rates, the formation of the expectation of depreciation of the home currency is easier than the formation of the expectation of appreciation. Furthermore, I reveal that credit conditions in the United States of America (USA) could affect global crisis expectations and thus have asymmetrical effects.

The existing theoretical literature on fiscal competition has to a large extent ignored the role of government debt as a determinant of taxes and productive public spending. We develop a simple model of fiscal competition with government borrowing. If a default on government debt is no option, initial debt levels play no role in fiscal competition. This neutrality result is overturned when a default is possible. A government that is constrained in its borrowing due to a possible default responds optimally by lowering spending on durable public infrastructure, which in turn induces more aggressive tax setting. A rise in exogenous firm mobility reinforces the link between legacy debt and fiscal competition. Our model may help explain the observation that highly indebted countries in Europe have decreased corporate tax rates over-proportionally. Our model may also be useful for evaluating decentralization reforms in which the power to tax firms is devolved to lower levels of overnments which differ in their initial debt levels.

This study used the Bayesian methodology to estimate and calibrate a small-scale DSGE model of the Philippines. The goal of this study was to review the risk associated with increases in sovereign deficits. The major results of the study are: Estimates of fiscal rules show that fiscal authority provides more emphasis on debt to GDP than output and deficits. In addition, the stochastic simulation shows that increases in public investment don't limit increases in private investment. And both public and private investment exhibit procyclical behaviors in presence of government spending shock. Lastly, the output is more persistent during episodes of technology shocks than on an increase in government spending. The paper also shows that there is no significant difference in result between the fiscal authority’s alternative fiscal rules of responding on levels of deficits and debt or levels of deficits and debt from its target.

The world economy has been struck by Covid-19 the same way people are struck by a lightning, fast and without warning, leaving nations out to dry on little to no reserves on their crucial supply side. Consequently, over the past year, economies shrunk, production drastically diminished, and governments were forced to take measures. In an unprecedented moment of contemporary history, many economists wondered what the consequences of such an event would be for macroeconomic variables over time and when would the economy be able to bounce back. In the monetary union, the challenge goes even further: how can the union adjust to these changes with common policies, and what measures should be taken to enhance the chances of a fast recovery? In this paper, we use a model to predict the values of real GDP growth and debt to GDP ratio for the next decade for two disparate EU countries, Germany and Portugal. This will help us better understand the evolution of macroeconomic variables to then make the connection with the efforts that can be taken by the European Union to provide a fast and safe recovery back to normality.

We propose a statistical methodology to quantify the financial implications of tropical cyclone-related physical risks implied by climate change. To address the sensitivity of disaster intensity to climate change, we provide a Monte Carlo methodology to generate synthetic cyclones consistent with climate scenarios of the Couple Model Intercomparison Project (CMIP5). Sovereign exposure and vulnerability assessments in principal tropical cyclone basins are based on projections of population densities in shared socioeconomic pathways coupled with downscaled physical asset values constructed using mixed data along with locally calibrated damage functions. Finally, we compute the direct climate impact on emerging countries’ bond spreads using the spread sensitivity to the debt to GDP ratio, assuming that damage costs are financed by issuing new government debt. We find that the ‘business as usual’ RCP8.5 concentration scenario coupled with the ‘middle road’ shared socioeconomic pathway (SSP2) leads to global average annual damages 142% larger than in the concentration scenario RCP2.6 allowing to remain under 2°C warming. In terms of emerging market impact, we estimate that in 2070-2100, the impact of extreme cyclones on the bond spread of most vulnerable countries will up to 200 bps higher in the RCP8.5 pathway than in the 2°C baseline. In every step of our assessment, we quantify the impact of model uncertainty on our results using 7 different climate models from the CMIP5 database.

This paper empirically studies public debt sustainability with the penalized panel splines approach for 25 EU economies from 2000 to 2019 by estimating the response of the primary surplus to lagged debt relative to GDP, respectively. A positive coe cient on average indicates sustainable policies, which is supported by all our results. Moreover, we show that this relationship is not homogeneous across the distribution of the debt ratios, but, varies with the magnitude of public debt to GDP. The estimations reveal a strongly increasing reaction for small and high debt ratios while it is rather flat for intermediate levels. This holds for normal times, too, whereas during years of economic crises a monotonously increasing response can be observed. Additionally, for a cluster consisting of smaller EU economies, there is indication of 'fiscal fatigue', meaning that the effort of active fiscal counter-steering peters out for high ratios of public debt to GDP. The same effect can be observed for the whole sample and for a sample including the large EU economies, once Greece is removed.

US federal debt held by the public rose from 35 percent of GDP in 2007 to 72 percent in 2015, reflecting the Great Recession as well as rising health and social spending, and then to 79 percent in 2019 following the 2017 tax cuts. In 2020-21 federal assistance to address the COVID-19 shock will reach over 25 percent of 2021 GDP. The prolonged trend of declining real interest rates since the early 1980s has reduced the real economic burden associated with a given debt to GDP ratio. In part because of new attention to interest rate versus growth rate dynamics, economic thinking has correspondingly shifted toward less concern about debt levels. Nonetheless, Congressional Budget Office projections adjusted for the $1.9 trillion American Rescue Plan indicate that the interest burden will rise from the recent 1½ percent of GDP to 2.3 percent by 2030 and 8.4 percent by 2050, as the debt ratio rises to 116 percent of GDP and 203 percent respectively. Feedback from the rising debt ratio boosts the real interest rate in the CBO’s model to about 1 percent by 2030 and 2½ percent by 2050. This study first estimates the ex-post realized real interest rate on federal debt over the past six decades. For projecting the debt burden, it suggests a prudential benchmark at the 33rd percentile in the past distribution, a real rate of 1 percent on the 10-year treasury note. Simulations of the CBO-based projections using this rate, which is higher in the 2020s but lower thereafter, find an interest burden of 4.7 percent of GDP by 2050, far above the average of 1.9 percent over the past six decades. At a real rate of 1 percent, classic Maastricht fiscal targets would shift to about 130 percent of GDP for the debt ceiling and 4 percent for the deficit. However, even these more lenient targets would not be met unless primary deficits are cut to about 1 to 2 percent of GDP, well below their current path rising from about 3 percent of GDP to 4.5 percent by the 2040s as social security and especially health outlays escalate.

Three econometric models were built to predict the 2020 General Election in Jamaica. These are the economics and security model (model1), the economics and security model with JLP leader acceptance (model 2), and the economics and security model with PNP leader acceptance (model 3). All three models accurately predicted a win for the Jamaica Labour Party. These models show how the macro-economy, security concerns and party leader popularity influence election outcome, with similar findings in the literature. However, there are peculiarities in Latin America and the Caribbean because the Jamaican voters respond to economic and security concerns in different ways than the voters in the global north. For e.g. increases in the debt to GDP ratio and the homicide rate predicted a JLP win. We therefore need to understand how voter microlevel characteristics, meso-level patterns of relationships and macro-level institutions influence election outcomes within and across Latin America and the Caribbean.

This study examined the impact of external debt in stimulating economic growth in Nigeria: mediating on the role of public sector financial management. Secondary data was explored using ex post facto. The variables employed involves Gross Domestic Product (GDP) as endogenous variable while Debt to GDP Ratio (DGR), Foreign Debt to Exports Ratio (FDER), Inflation Ratio (INFR), Interest Service Ratio (ISR) and Exchange Ratio (EXR) as exogenous variables and were obtained from World Bank International Debt Statistic and Central Bank of Nigeria Statistical Bulletin for the period of 1989-2019. Diagnostic tests were conducted using Auto Regressive Distributed Lag (ARDL), Augmented Dick Fuller (ADF) Unit Root Test, and Co-Integration model. The result revealed the presence of co-integration among the variables with clear indication that external debt has a significant and positive relationship with economic growth with strong emphasis on public sector financial management as mediating factor. It was concluded that Nigeria debt crisis was attributed to both exogenous and endogenous factors due to dwindling economy. The study recommends that government should develop home-grown policies to enhance the country’s competitive advantage in the global market. Government should exit from all forms of commercial debts that expose the country to another regime of debt overkill.

This paper derives the optimal response of the primary budget surplus to changes in the debt-to-GDP ratio in a stochastic model of debt. Under the optimal solution the surplus reactivity to the debt-to-GDP ratio is independent of the debt ratio itself, but its size depends on economic fundamentals and on the degree of uncertainty surrounding the impact of fiscal policies. We propose two measures of fiscal resilience under the optimal control that may be used to gauge the soundness of a consolidation plan and as early warning indicators of fiscal imbalances.

We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macro-finance model. Three results stand out: (i) GDP-linked bond prices would embed sizeable and time-varying risk premiums of about 40 basis points, (ii) for a fixed budget surplus, issuing GDP-linked bonds does not necessarily imply more beneficial debt-to-GDP ratios in the medium- to long-run, and (iii) the debt-stabilizing budget surplus is more predictable under such issuances at the expense of being higher on average. Our findings call into question the view that GDP-linked bonds tame debt.

Since October 17, 2019, thousands of Lebanese all over Lebanon flood the streets furious with the economy collapse and requesting “all government parties out.” The anti-government protest, or what is called “October Revolution” is the largest since almost 15 years, with no support of any political party. The October 17 Revolution did not start out of the blue, Lebanon had been facing dramatic economic drawbacks from 2009, where GDP growth reached 10.1% at the mentioned year and started to decline ever since to 0.2% in 2019 (Blominvest Bank, 2018). According to the Central Intelligence Agency 2017, Lebanon ranked the 3rd highest country with Debt to GDP ratio as it recorded 152.8%, this ratio compares country’s public debt to its Gross Domestic Product (GDP).

We study the role of sovereign debt for equity returns in the Covid-19 pandemic. Using individual stock-level data of more than 25,000 firms in more than 80 countries, we exploit variation in debt-to-GDP in narrowly defined industries and geographical regions. Following the outbreak of the pandemic, cumulative returns and cumulative CAPM-adjusted abnormal returns are lower in countries with higher debt-to-GDP ratios. Variation in debt-to-GDP explains around 23% of the average stock price decline in the initial phase of the pandemic. While corporate default risk rises, we find little evidence that debt-to-GDP captures uncertainty across countries. As the pandemic evolves, we further show that abnormal returns drop more in response to the same growth in infections among high- compared to low-debt-to-GDP countries. Our results are robust to a host of firm- and country-level controls, including sovereign credit ratings. Overall, sovereign debt is a key determinant of equity risk in the face of disaster.

Recent developments in South Africa warrant a complete understanding of the fiscal dynamics within the economy. The government budget deficit has soured to unprecedented levels pushing the debt to GDP ratio above 60%. We seek to reveal in this paper the impact this has on the South African long term bond yield, which represents the cost of borrowing to government. Our approach entails investigating the determinants of the long term bond yield for South Africa using linear and non-linear single equation Auto-regressive distributed lag (ARDL) approach. Our results show that the short-term interest rate is the major determinant of long term yields in South Africa, showing a persistent positive and statistically significant relationship with the long term yield. Furthermore, we find that government debt and the US long term yield are positively related to long term bond yields both in the short and long-run. Our tests for linearity reveal that the short-term interest rate has a non-linear relationship with the long-term bond yield. The rate of inflation, nominal exchange rate and bank credit all have negative impacts on the bond yield in the long-run. Economic growth has a positive impact in the short run but impact the long-term yield negatively in the long-run. We suggest a coordinated approach between monetary policy and fiscal policy authorities, a systematic program of deleveraging and implementation of structural strategies aimed at increasing production.

* The draft reform of the European Stability Mechanism (henceforth ESM) was not approved as scheduled in the Euro Summit in December 2019 because the Italian Prime Minister was obliged to ask for a delay in the face of strong domestic opposition to the reform coming from populist parties. * It is not clear if the reform will ever be approved and if, in this case, the Conte government will survive. * The arguments used by the populists against the reform are deeply flawed. * The proposed changes in the text of the EMS Treaty are relatively minor and do not contain any mechanism of automatic restructuring of the debt of countries asking for financial assistance from the ESM. * However, the small changes in the text reflect the idea that Italy will soon be obliged to restructure the debt. The only possible answer by the Italian authorities is to set up a plan for a gradual reduction of the debt to GDP ratio. * Restructuring the debt may be a painful necessity, but it is not a way to solve the problem of the debt in a country in which most of the debt is held by residents.

With the global financial crisis, there was a surge in the levels of public debt resulting from the economic downturn and many developing countries resorting to external debt to meeting their civic obligations. This paper examines the debt problem in developing countries in Africa between 2010 and 2017. The study employed the use of measurement of government’s indebtedness as well as sustainability of the debt measure to evaluate the ratio of gross public debt to the gross domestic product and to ascertain how well the borrowed funds are used by the government. Importantly, the change in ratio of public debt to GDP was examined over a 4-year period (2010-2016). Three measures were used in analysis of the data, ratio of debt to GDP, ratio of dynamic debt to GDP ratio and sustainability of debt levels. The research finds that there is a growing public debt in developing countries that is fueled by external debt and the global financial crisis. As a result of a rapid increase in public debt, one third of developing countries in Africa are at high risks of debt distress. Some of these countries are Chad, Eritrea, Mozambique, South Sudan, Sudan, Somalia and Zimbabwe. By 2016, the sub-Saharan countries gross public debt to GDP ratio had doubled. This increase in debt should have raised all sorts of red flags as the World Bank and International Monetary Fund should have sounded the alarm. Furthermore, the results reveal that three of the biggest countries in Africa, Nigeria, South Africa and Angola have been classified as moderate debt risk distress. While the following countries in 2018 have breached the debt to GDP ratio benchmarked at 50 percent mark Ghana, Ethiopia, Kenya, Cameroon and Zambia. The study further recommends that these countries should mind their public spending activities.

The rise of two Asian powers both in East and West, in this case Indonesia and Turkey is an inevitable necessity. These two forces have inspired many emerging forces to penetrate the same two forces. Inter-relations between Turkey and Indonesia in a way can be seen from the same comparison of indicators for two different countries. Some of the main indicators of comparison in both countries are the rate of growth per capita, the ratio of debt to GDP as well as the rate of population growth in both countries. Both countries have a history in common and currently the two countries are at the forefront of emerging countries. This article discusses the relationship of Turkey and Indonesia based on the pattern of trade in the two countries, which in this case focuses on the pattern of interrelation of stock trading in the two countries. Using the VAR methodology will try to parse the pattern of relations between the two countries in terms of inter relations in both trade and the real sector that are the mainstay of the two countries.

This paper analyzes the inflation targeting experience of developing countries as an effective monetary policy framework to promote changes in the currency composition of their international debt. Using matching with difference-in-differences to address the self-selection bias, we find that inflation targeting has led to a 3–6 percentage point reduction in the foreign currency share of international debt in targeting countries when compared to non-targeting countries, with the effect especially pronounced for sovereign international debt. Differentiating by type of owner, we find a reduction of the foreign currency share in foreign-held total sovereign debt but no effect on domestic-held debt. Furthermore, from the analysis of the US dollar and euro shares, we find that inflation targeting has contributed to a 9 percentage points lower dollar share in international debt in targeting countries compared to non-targeting countries, while the effect on the euro share is negligible. This not only provides evidence that the structural features of international financial markets matter, but also that monetary policy can help developing countries reduce their reliance on foreign currency debt, especially if it is held by foreign investors.

This paper investigates the link between corporate debt and investment for a group of five peripheral euro area countries. Using firm-level data from 2005 to 2014, we postulate a non-linear corporate leverage-investment relationship and derive thresholds beyond which leverage has a negative and significant impact on investment. The investment sensitivity of debt increased after 2008 when financial distress intensified and firms had a lower capacity to finance investment from internal sources of funds. Our results also suggest that even moderate levels of debt can exert a negative influence on investment for smaller firms or when profitability is low.

We study optimal debt management in the face of shocks that can drive the economy into a liquidity trap and call for an increase in public spending in order to mitigate the resulting recession. Our approach follows the literature of macroeconomic models of debt management, which we extend to the case where the zero lower bound on the short-term interest rate may bind. We wish to identify the conditions under which removing long-maturity government debt from the secondary market can be an optimal policy outcome. We show that the optimal debt-management strategy is to issue short-term debt if the government faces a sizable exogenous increase in public spending and if its initial liability is not very large. In this case, our results run against the standard prescription of the debt-management literature. In contrast, if the initial debt level is high, then issuing long term government bonds is optimal. Finally, we find a role for revisions in the debt management strategy during LT episodes, whereby the government actively manages the maturity structure, in some cases removing long bonds from the secondary market.

We examine the relation between chief executive officer (CEO) inside debt holdings and the firm's choice between debt and equity financing when it accesses external capital markets. We find positive relations between CEO inside debt holdings and both the firm's likelihood to issue debt and the proportion of debt of their total external financing. Additional analysis indicates that CEO inside debt is negatively related to the cost of debt and positively related to the stock price reaction around the public debt issue announcement. Our results are consistent with the argument that inside debt aligns managers' and debtholders' interests leading to favorable debt terms that motivate firms to raise debt to meet their capital needs.

The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.

We identify the effect of the bank credit shock of the 2007–2009 crisis on corporate debt structure by analyzing the substitution of bank debt with nonbank debt (both private and public). Using firm-level data in 34 countries, we find that nonbank credit partially substitutes bank loans in bank-dependent firms after the onset of the global financial crisis. However, there are differences across countries depending on creditor rights and information sharing among creditors. Strong creditor protection in bankruptcy increases the reduction in bank debt whereas a collateral regime favors substitution with private nonbank debt. Information sharing favors substitution with public debt.

The median U.S. non-regulated firm reports a 47% decline in leverage ratio between 1980 and 2010. We investigate whether the cost-benefit tradeoff to shareholders, captured by the valuation impact of an additional dollar of debt on owners' equity, is an explanation for the observed change in leverage. Using Faulkender and Wang (2006) methodology, we find that shareholders view increasing debt to have a negative impact on their wealth, that is, shareholders perceive firms to be over-levered. Further, the net cost of issuing additional debt has increased steadily for three decades beginning in 1980 before declining marginally after 2010. This trend holds for different groups of firms classified on factors known to affect capital structure decisions. Managers respond to the changing cost to shareholders by reducing (increasing) leverage when the cost of debt increases (decreases). The time-series pattern in the marginal cost of debt persists after controlling for firm-specific characteristics. We find that macroeconomic factors, such as federal debt, play a role in explaining the marginal value of debt.

This paper examines the potential for monetary policy to avoid self-fulfilling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. Monetary policy could preclude a debt crisis through raising inflation and output and lowering the real interest rate. These reduce the real value of outstanding debt and the cost of new borrowing, and increase tax revenues and seigniorage. We determine the optimal path of inflation required to avoid a self-fulfilling debt crisis. Stronger price rigidity implies more sustained inflation.

International audience; This paper analyzes the business cycle behavior of the corporate debt structure and its interaction with economic recovery. The debt structure is measured as the share of bonds in the total credit to non-financial corporations for a quarterly panel of countries over the period 1989–2013. We first show that the substitution of loans for bonds in recoveries is a regular property of business cycles. Secondly, we provide evidence that economies with high bond share and important bond-loan substitution recover from the recessions faster. This identified link between corporate debt structure and business cycles is robust to the inclusion of traditional factors which shape recessions and recovery such as the size and the quality of financial markets, the occurrence of bank crisis, the dynamics of credit, and the distribution of firm size. © 2017 Elsevier B.V.

We document cyclical fluctuations in scheduled payments of newly issued sovereign debt. During recessions, scheduled payments become more back-loaded. Our results provide direct evidence on a key parameter governing the functional form of cash flows in the long-term debt literature.

Japan’s net government debt is 130% of GDP in 2013. The present paper analyzes the effect of the large government debt on welfare. We use a heterogeneous agent, incomplete markets model with idiosyncratic wage risk, a borrowing constraint, and endogenous labor supply. We calibrate the model to the Japanese economy using evidence based on macro-level and micro-level data. We find that the optimal level of government debt is –50% of GDP for Japan. The welfare cost of keeping government debt to 130% of GDP rather than the optimal level is 0.19% of consumption.

This paper characterizes capital taxation and public debt policy in a quantitative macroeconomic model with an impatient government and uncertainty. The government has access to linear taxes on capital and labor, and to non-state-contingent bonds. Government impatience generates positive and empirically realistic long-run levels of both capital taxes and public debt. Prior predictive analysis shows that the simulated model matches the distribution of both variables in a sample of 42 countries, alongside other statistics. The paper then presents econometric evidence that countries with higher political instability, used as an approximation of unobservable public discount rates, have both higher capital taxes and debt.

We study public debt in competitive equilibria in which a government chooses transfers and taxes optimally and in addition decides how thoroughly to enforce debt contracts. If the government enforces perfectly, asset inequality is determined in an optimum competitive equilibrium but the level of government debt is not. Welfare increases if private debt contracts are not enforced. Borrowing frictions let the government gather monopoly rents that come from issuing public debt without facing competing private borrowers. Regardless of whether the government chooses to enforce private debt contracts, the level of initial government debt does not affect an optimal allocation.

The recent euro area sovereign debt crisis has shown the importance of market reactions for the sustainability of debt in advanced economies. This paper calculates endogenous government debt limits given the markets assessment of the probability to default. The estimated primary balance reaction function to growing debt has the “fiscal fatigue” property (a loosening fiscal effort makes the primary balance insufficient to support rising debt) at high debt levels. The combination of this feature of the primary balance reaction function with the market interest rate reaction to growing debt determines the government debt limit beyond which debt cannot be rolled over. An application to OECD countries over the period 1985 – 2013 with a model-based risk-premium shows that current debt limits are high for most of the OECD thanks to particularly low risk-free interest rates. It also shows for some countries that current debt levels are not sustainable without a change in government behaviour. Most importantly, the framework illustrates the state contingent nature of debt limits and therefore the vulnerability of governments to a change in macroeconomic conditions and to market reactions. Last, computations with an estimated interest rate reaction to public debt illustrate that debt limits are lower in the euro area than in other countries because of a sharper market interest rate reaction to rising debt.

What explains public debt spikes? Are debt spikes different in emerging economies than in advanced countries? Analysis of 179 episodes from 1945 to 2014 shows that debt spikes are not rare events and their probability increases with time. Large debt spikes in advanced and emerging countries are neither driven by high primary deficits nor by output declines but instead by sizable stock-flow adjustments (SFAs). Higher SFA accumulation is associated with a higher probability of suffering non-declining debt paths in the aftermath of public debt spikes. Importantly, despite their sizeable impact on debt accumulation, SFAs have been largely ignored in debt sustainability analyses.

This paper examines the relationship between house prices and consumption, through the use of debt. Using unique Canadian household-level data that reports the uses of debt, we begin by looking at the relationship between house prices and debt.

We examine the role played by government investment in infrastructure in determining the optimal quantity of public debt in a heterogeneous agent economy with incomplete insurance markets. Calibrating our model to the key aggregate and distributional moments of the U.S. economy, we show that, (i) the inclusion of infrastructure, and (ii) transitional dynamics between stationary states critically affects the characterization of the optimal level of public debt. Welfare comparisons between stationary equilibria indicate that it is optimal for the government to accumulate assets (public surplus). However, once transitional dynamics are accounted for, the optimal share of public debt turns out to be positive and close to the current level of public debt in the U.S. These contrasting results underscore a previously ignored channel through which public investment and tax policies can generate differential trade-offs for the precautionary savings motive for households in the short run and long run. Our results also indicate that the inclusion of public infrastructure in the model specification implies a lower level of optimal debt relative to the model without infrastructure, both when comparing steady states as well as accounting for transitional dynamics.

This paper examines the role of foreign versus domestic ownership in reducing the debt levels of acquired firms in Italy and Spain over the period 2002–2010. Acknowledging that lower debt levels can mitigate the risk of failure and thus enhance the chances for a positive post-acquisition performance and survival, we particularly examine the causal effect of foreign and domestic acquisitions on two firm-level debt measures: gearing and short-term leverage. To estimate causal relationships, we control for selection bias by applying propensity score matching techniques. Our results indicate that foreign acquisition leads to a significant and steady reduction in the debt ratios of the target companies. In contrast, the relationship between domestic acquisition and debt reduction appears to be smaller and statistically less robust.

What are the welfare consequences of debt reduction policies? In this paper, we answer this question with the help of an incomplete markets economy with production in which households are subject to uninsurable income shocks. We focus on policies that raise revenues from taxing income. We make three contributions. First, we show that quantitatively sizable welfare gains can be reaped by reducing debt, at least in the long-run. Second, we find that, for some policies, the short-run losses that occur during the transition more than outweigh the long-run gains. And third, we show that both short-run and long-run welfare effects of government debt depend on the income composition of the consumption-poor. In our calibration, we thus target the skewed wealth and the earnings distribution of the US economy. Our results have important implications for the design of debt reduction strategies. Policies that imply more redistribution will find more political support, as they compensate the consumption-poor, who suffer the most during the transition.

An important issue within the present economic crisis is understanding the dynamics of the public debt of a given country, and how the behavior of average consumers and tax payers in that country affects it. Starting from a model of the average consumer behavior introduced earlier by the authors, we propose a simple model to quantitatively address this issue. The model is then studied and analytically solved under some reasonable simplifying assumptions. In this way we obtain a condition under which the public debt steadily decreases., Comment: 4 pages, 1 figures, submitted for publication to Physica A

This paper establishes a nonlinear theoretical model and uses panel smoothing transitional regression to study the optimal levels of government investment and public debt in a growth model using a panel dataset of 65 developed and developing economies over the period 1991–2014. The empirical results show that the effect of government investment on economic growth is decreasing as the level of expenditure rises. When the government investment/GDP ratio reaches a certain point (threshold), the effect of government investment could change from positive to negative. The effect of public debt on economic growth demonstrates a similar pattern. Our results suggest that there must exist an optimal level of government investment or public debt as far as economic growth is concerned, although the optimal level may vary in different economies. The government investment/GDP and public debt/GDP ratios of China were respectively 15.66% and 41.14% in 2014. These levels did not reach their respective thresholds and hence their effects on economic growth were still in the positive territory. Despite the expansion of government investment and public debt in China after the world financial crisis, their scales had not affected the country's economic growth during the data period.

Recent rises in the ratio of Australian housing prices and household debt have become an issue of public debate. This paper outlines the Reserve Bank of Australia’s investigation into this issue. Three areas are examined: aggregate trends in housing prices, debt and household incomes; the distribution of household debt and their effect on the economy as a whole. It is found that part of the cause of the rising ratio of house prices to household debt has been a recent slowdown in household income, strong demand from overseas buyers and strong population growth. While borrowing has added to the upward pressure on prices the underlying cause is embedded in the supply–demand dynamics. It is concluded that the recent increase in household debt relative to incomes has made the economy less resilient to future shocks.