Institutional arrangements and public debt threshold limits

Inter-governmental Organisations, such as the IMF and OECD, advocate a medium-term reduction in deficit spending and public debt accumulation among advanced economies to satisfy conditions of fiscal sustainability. Buttressing the need for fiscal austerity, Reinhart and Rogoff claim to have identified a so-called tipping point, beyond which public debt accumulation negatively affects economic growth. While recent data seem to indicate that some Eurozone (non-sovereign) economies have reached a tipping point, for other advanced (sovereign) economies, such as the US, UK and Japan, this is not clear. The mainstream tipping point literature however does not recognise the importance of institutional arrangements for the conduct of fiscal and monetary policy. Furthermore, the literature sheds little light on the transmission mechanism between high public debt and low economic growth. This article draws on the principles of Modern Monetary Theory to discuss institutional arrangements and to justify the theoretical and empirical focus on Eurozone economies. The empirical analysis unpacks the transmission mechanism(s) to reveal that Eurozone economies have reached a public debt threshold limit with respect to long-term interest rates.     

欧债危机成因与前景的制度分析

希腊等欧元区国家的主权债务危机可以说是欧洲区域一体化建设中的独特现象,其折射的是欧元区所存在的一个结构性问题：奉行单一货币政策和各国分散的财政政策,集中暴露出了欧洲货币一体化与欧洲福利资本主义的不相容、以及统一货币运行所要求的财政紧缩与欧元成员国经济增长和福利制度之间的矛盾与冲突;欧元不会就此瓦解,但欧债问题的最终解决困难重重;欧元的未来取决于自由与市场的回归欧洲,取决于欧盟的制度完善与欧式福利资本主义改革的成功与否。     

Fiscal multipliers in the Eurozone: an SVAR analysis

We compute the value of fiscal multipliers (for government primary expenditure, Income and wealth taxes and for Production and import taxes) in the Eurozone countries since the creation of the currency union (2000Q1-2016Q4), in order to understand how the values can vary according to the public debt level, the pace of economic growth, and the output gap. Imposing quarterly fiscal shocks, the results showed that government expenditure had a positive effect on output, with an annual accumulated multiplier of 0.44, whereas tax multipliers presented negative signs: the Income and wealth and the Production and import taxes stood at ?0.11 and ?0.55, respectively. Furthermore, the spending multiplier showed a higher value for countries with lower levels of public debt, during recessions, and in countries with negative output gaps. On the other hand, tax shocks seemed to be recessive in highly indebted countries and those facing positive output gaps.     

The Eurozone Sovereign Debt Problem: What It Means for U.S. Exports

The European sovereign debt problem became the focus of world attention in 2010, when the interest rates on Greek government bonds rose dramatically, requiring immediate action by the European Union to avoid an imminent default. It has become clear that the problem is not limited to Greece, but a more general problem of the fundamental imbalances and underlying inconsistencies in the Eurozone economic system of using a single currency for a set of countries that lack a unified economic and political system. Financial markets reacted to the debt offering of the other deficit countries in the Eurozone by increasing interest rates on their sovereign debt as well. The major consequences are likely to be largely felt by the Eurozone countries themselves, some of whom will be forced to go through significant structural adjustments over the coming years. The adjustment process could generate a range of alternative macroeconomic outcomes for affected countries??including differences in growth, exchange rates, and investment??which could have significant implications for U.S. trade. This paper attempts to allay some of that uncertainty by exploring a wide range of alternative global macroeconomic outcomes and their potential impact on U.S. exports. The analysis extends the work done in a previous paper which focused on U.S. agricultural exports and its major components. While U.S. exports vary across the scenarios, continued strong economic growth in developing countries supports demand for U.S. exports. Because the EU has represented a declining share of U.S. exports, the direct impact of changes in European demand affects U.S. exports less than the secondary effects of changes in exchange rates and global investment patterns associated with alternative EU outcomes.     

Debt,seigniorage, and the Growth Laffer Curve in developing countries

The endogenous growth literature established the existence of an inverted-U curve between taxes and economic growth, namely a Growth Laffer Curve, but empirical evidence on this relationship in developing countries is rather limited. Given that seigniorage and public debt are also important means of financing public spending in these countries, we take into account in this paper their respective impacts on growth, as they might deform the existing relationship between taxes and growth. To this end, we develop a growth model with public investment as the engine of perpetual growth, and look for the effect of debt, tax and money financing on economic growth. We study in particular the way fiscal and monetary policies deform the Growth Laffer Curve in developing countries. An empirical section based on a panel of 100 developing countries over the period 1980–2010 provides both OLS-Fixed Effects and GMM-system estimations that support our theoretical conclusions, namely the existence of Growth Laffer Curves indexed by the levels of debt and of seigniorage.     

Increase in home bias in the Eurozone debt crisis: The role of domestic shocks

One of the most striking consequences of the recent episode of sovereign debt market stress in the Eurozone has been the increase in the share of public debt held by the domestic sector in fragile economies. However, the causes and potential consequences of this increase were only given scarce attention in the literature on the Euro area sovereign debt crisis. In order to fill this gap, we first determine the shocks that impact the variation in the share of sovereign debt held at home in an SVAR model on a sample of Eurozone countries between 2002 and 2014, distinguishing between external and domestic shocks. Thanks to several alternative tests, we show that home bias in sovereign debt responds positively to country-specific fundamentals and expectation shocks but we find no evidence that the increase in home bias is destabilizing per se in the short-run. Second, a stylized theoretical model backed by the empirical results predicts that the consequences for sovereign debt crisis depend on the relative impact of domestic initial destabilizing shocks and increased home bias. The analysis suggests that an increase in home bias in times of sovereign debt stress, despite reflecting deteriorating fiscal conditions, may make default less likely.     

Cross-country fiscal policy spillovers and capital-skill complementarity in integrated capital markets

The 2010 European sovereign debt crisis has renewed discussions on fiscal policy coordination. One rationale for coordination is fiscal policy cross-country spillovers. A common finding in the literature is that spillovers tend to be small in normal circumstances but can be large if monetary policy is at the zero lower bound. Orthogonal to the existing literature, we document a novel channel that generates cross-country spillovers over the medium run. We assume perfect capital markets integration and find that capital-skill complementarity can lead to large spillovers without the zero lower bound nor a large import share in government expenditures. As capital markets have become increasingly integrated in the Eurozone, the current degree of fiscal policy coordination between its members, low, may be insufficient. We also find that the smoothing benefits from a temporary rise in public debt spill over to other countries.     

Fiscal limits in developing countries: A DSGE Approach

This paper studies fiscal limits in developing countries using a dynamic stochastic general equilibrium (DSGE) approach. Distributions of fiscal limits, which measure a government’s capacity to service its debt, are simulated based on macroeconomic uncertainty and fiscal policy. The analysis shows that expected future revenue plays an important role in explaining the low fiscal limits of developing countries, relative to those of developed countries. Large devaluation of real exchange rates can significantly reduce a government’s capacity to service its debt and lower the fiscal limits. Temporary disturbances, therefore, can shift the distribution of fiscal limits and suddenly change perceptions about fiscal sustainability.     

中国地方政府债务可持续、财政空间与经济增长*

根据Ghosh et al（2013）财政空间理论，利用2010—2019中国省级面板数据，对中国省级政府债务可持续、财政空间和经济增长之间的关系及其机制进行了研究。结果表明，中国个别省份出现了财政疲劳现象，要把控好债务风险雷区，但各地区债务限额存在异质性，在不损害可持续性的情况下，大部分地方政府有足够的“回旋余地”实施财政刺激政策。我国省级政府的财政空间和经济增长之间存在倒“U”型关系，即当政府负债率高于财政空间的临界点（或较低的财政空间）时开始阻碍经济增长，因此，需要通过降低政府负债率实现更高的增长。进一步研究发现，政府债务影响经济增长最重要的渠道是公共投资和私人投资，全要素生产率、储蓄和长期真实利率也是政府债务影响经济增长的重要渠道，而长期名义利率未能成为政府债务影响经济增长的渠道。     

Sovereign default risk premia,fiscal limits,and fiscal policy

We develop a closed economy model to study the interactions among sovereign risk premia, fiscal limits, and fiscal policy. The fiscal limits, which measure the government's ability to service its debt, arise endogenously from dynamic Laffer curves. The state-dependent distributions of fiscal limits depend on the growth of lump-sum transfers, the size of the government, the degree of countercyclical policy responses, and economic diversity. The country-specific fiscal limits imply that the market perceives the riskiness of sovereign debt issued by different countries to be different, which is consistent with the observation that developed countries are downgraded at different levels of debt. A nonlinear relationship between sovereign risk premia and the level of government debt emerges in equilibrium, which is in line with the empirical evidence that once risk premia begin to rise, they do so rapidly. Nonlinear simulations show that fiscal austerity measures that aim to balance the government budget in the short run fail to contain the default risk premium, even with sizeable cuts in government purchases; but a long-term plan for fiscal reform, if it credibly changes the market's expectation about future fiscal policies, can alleviate the rising risk premium.     

Debt sustainability in emerging market countries: Some policy guidelines from a fan-chart approach

This paper uses a probabilistic approach to simulate the medium-term public debt trajectories of several major emerging market countries. We extend the standard debt sustainability analysis framework so as to more faithfully reproduce these countries’ economic reality in two aspects. First, we allow them to differ in the cyclical stance of their fiscal policy and in their degree of fiscal responsiveness to debt. Second, we explicitly integrate the specific risk premium paid by each country when borrowing in foreign currency. It allows us to evaluate the impact of alternative policies that the government may consider to improve sustainability. The results lead to three policy recommendations: i) a country should consider decreasing its exposure to currency risk only in extreme cases (like Argentina); ii) on the contrary, greater fiscal responsiveness (i.e. stronger fiscal tightening whenever there is a debt increase) could enhance sustainability to a much greater extent; iii) countries with low responsiveness to debt or a poor fiscal consolidation track record should be cautious with countercyclical fiscal policies, as they may trigger an unsustainable debt trajectory in the trough of the economic cycle.     

Variation in the fiscal multiplier with the method of financing: evidence across industrial countries

Government spending has often varied with the business cycle to stimulate the economy and to revive economic conditions. However, the state of public finances has often necessitated higher borrowing to finance widening fiscal deficits. Indeed, recent austerity packages around the globe have crystalized the importance of fiscal consolidation against the backdrop of rising public debt. To shed light on recent debates regarding fiscal multipliers, the article estimates variation in these multipliers with the method of financing, using annual data for a sample of industrial countries. There is a large variation in the effects of expansionary and contractinary government spending shocks on economic variables within and across countries. The significant effects of negative government spending shocks (fiscal contraction) appear more prevalent than those of expansionary shocks on real output growth, price inflation and nominal wage inflation. Consistent with theory’s predictions, the fiscal multiplier is more likely to be negative when government spending is financed by issuing debt and less likely in the case of monetization. The evidence confirms concerns about the negative effect of higher debt and more expensive financing on private activity, countering the effectiveness of fiscal policy.     

The trade-off between public debt reduction and automatic stabilisation

This paper addresses the basic tradeoff between the stabilisation properties of budgets and the sustainability of long run fiscal positions. The modeling framework consists of a simple non-monetary endowment economy with overlapping generations, extended to account for stochastic endowments and borrowing constrained households. A benign government chooses the optimal degree of responsiveness of net taxes to individual incomes and an optimal measure of long-run public debt in order to smooth households' consumption across states of nature. In the presence of a deficit constraint for the government, the results point to the desire for lower debt levels than those currently prevailing in European Union countries in order to enable a more effective hedging of personal income uncertainty by means of more active automatic fiscal stabilisers. The optimal degree of automatic stabilisation and debt reduction is conditional on the characteristics of economic cycles.     

TAX PROJECTIONS AND ECONOMIC FORECASTS BY GOVERNMENT BUREAUCRATS: HIDDEN MANOEUVERINGS BEHIND FISCAL RECONSTRUCTION IN JAPAN*

This paper investigates how the hidden manoeuvrings of governments' fiscal department bureaucrats affect tax projections and economic growth forecasts. The empirical results suggest that they underestimate their tax projections when these are based on their forecasts of government debt. We also analyze the manoeuvrings of fiscal bureaucrats on economic forecasts and find that their forecasts of economic growth rates depend on their own projections of government debt and fiscal deficits.     

Fiscal policy,rent seeking,and growth under electoral uncertainty: theory and evidence from the OECD

Abstract. We construct a general equilibrium model of economic growth and optimally chosen fiscal policy, in which individuals compete with each other for a share of government spending and two political parties alternate in power according to exogenous electoral uncertainty. The main prediction is that uncertainty about remaining in power results in increased fiscal spending, which in turn distorts incentives by pushing individuals away from productive work to rent‐seeking activities; then, distorted incentives hurt growth. This scenario receives empirical support in a dataset of 25 OECD countries over the period 1982–96. In particular, uncertainty about remaining in power leads to larger government shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives and this is bad for growth.     

The effectiveness of fiscal spending in Croatia,Slovenia and Serbia: the role of trade openness and public debt level

Various structural characteristics of economies, directly or indirectly, affect the transmission from government stimuli to economic activity and determine the size of fiscal multipliers. In this article, we expand the standard Blanchard–Perotti fiscal SVAR model by incorporating the public debt and trade openness variables to assess the influence of these structural determinants on the effectiveness of fiscal spending in three selected former Yugoslav countries – Slovenia, Croatia and Serbia. The results confirmed the main hypotheses, which state that public debt level and trade openness significantly affect the effectiveness of fiscal spending through the means of reduction in size of fiscal effects in all countries analysed. When comparing internationally, this reduction tends to be more evident in countries with a higher degree of average public debt level and trade openness.     

‘An Incomplete Contract Approach to Eurozone Fiscal Governance’ – Commitment vs. Flexibility

In this paper, we take an incomplete contract approach to Eurozone Fiscal Governance between the European Commission (EC) and any heavily debt member state, Greece in particular. Incomplete contract approach makes possible to put a long process of Eurozone Fiscal Governance into an extensive form game in which a renegotiation procedure is incorporated. We theoretically reveal the conflict of interests between the EC (Germany) and Greece over the Greek debt repayment plan proposed in 2015. We show that the Greek’s position is consistent with incomplete contract theory, but that the EC (Germany) does not allow the renegotiation for restructuring for growth-oriented debt repayment program proposed by the Greek government because the EC (Germany) judges that the commitment effect (on fiscal austerity) is greater than the flexibility one (pro-growth effect). This will undoubtedly provide a novel and interesting approach to Eurozone Fiscal Governance.     

Fiscal rules in a monetary economy: Implications for growth and welfare

This study considers two fiscal rules, a debt rule that controls the debt‐to‐gross domestic product (GDP) ratio, and an expenditure rule that controls the expenditure‐to‐GDP ratio, in a monetary growth model with financial intermediation. Tightening of fiscal rules promotes economic growth and thus, benefits future generations. However, there could be two equilibria of the nominal interest rates, and the welfare effects of the rules on the current generation are different between the two equilibria. In particular, the effects of a decreased debt‐to‐GDP ratio depend on its initial ratio; a high (low)‐ratio country has no incentive (an incentive) to reduce the ratio further from the viewpoint of the current generation's welfare. This result provides an explanation for difficulties with fiscal reform in countries with already high debt‐to‐GDP ratios.     

External Debt and Growth in Emerging Economies

The paper studies the relationship between external debt and economic growth in a panel of emerging countries. A number of economists have proposed different methods of analysing the nexus between economic growth and public debt. The paper investigates the debt-growth nexus using a linear and non-linear specification, employing a panel ARDL model on 13 emerging countries during the period 1990–2016. The results show that there is no robust effect of debt on economic growth in the long run; however in the short run, external debt is negatively and significantly correlated to economic growth.     

Fiscal Multiplier in Microstates: Evidence from the Caribbean

The global financial crisis and the attendant Great Recession of 2007–2009 have spawned a full-scale re-examination on the effectiveness of fiscal policy throughout the world. While this has led to a plethora of analyses in developed countries, the same abundance of the work has not been evident for developing counties. This paper uses time-series analysis to examine the multiplier impact of fiscal policy on growth and other macroeconomic variables in the case of four Caribbean states. Although these countries have similar degrees of openness, they differ in debt burdens and economic structures, thus providing a natural laboratory for this investigation. We concluded that fiscal multipliers among the sample countries are quite low and that the contemporaneous fiscal stance appears to be pro-cyclical.