Borrowing to Finance Public Investment? The ‘Golden Rule of Public Finance’ Reconsidered in an Endogenous Growth Setting*

In this paper, we look for long‐run and short‐run effects of fiscal deficits on economic growth and welfare in a standard endogenous growth model. We show that, under very general hypotheses, the ‘golden rule of public finance’, which allows a government to run public‐investment‐oriented fiscal deficits, leads to a lower balanced‐growth path in the long run, and eventually in the short run, compared with balanced‐budget rules. Welfare effects are more difficult to assess, and depend on the form of the utility function. Our model shows that debt rules such as the golden rule may improve (if the consumption elasticity of substitution is ‘low’) or weaken (if the consumption elasticity of substitution is ‘high’) intertemporal welfare. Consequently, a balanced‐budget rule does not necessarily dominate debt rules from the point of view of welfare, while it does from the point of view of long‐run economic growth.     

Analyzing state government spending: balanced budget rules or forward-looking decisions?

We analyze US state government spending behavior with a general intertemporal model allowing for asymmetry in balanced budget rules in a panel data setting. We find no strong evidence for forward-looking behavior in state spending; balanced budget rules are a significant constraint. States with budget rules imposing lighter restrictions are more likely to exhibit habit formation, while those with stricter rules demonstrate asymmetric responses to revenue changes. Evidence for a precautionary savings motive is limited. Balanced budget requirements trigger substantial pro-cyclical spending, possibly amplifying state economic volatility for states with tight fiscal rules, especially after revenue increases.

     

Sovereign bond market reactions to no-bailout clauses and fiscal rules – The Swiss experience

We analyse the effects of a credible no-bailout policy and stringent sub-national fiscal rules on the risk premia of Swiss sub-national government bonds in the period from 1981 to 2007. In July 2003, the Swiss Supreme Court decided that the canton of Valais is not liable for municipal debt. This landmark decision reduced cantonal risk premia by about 26 basis points and cut the link between cantonal risk premia and the financial situation of the municipalities that existed before. The result demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor. Additionally, strong and credible balanced budget rules reduce risk premia.     

我国省级人大预、决算审查报告的分析

本文以17省(区、市)的预算监督审查条例、4省(区、市)6年24份预算执行情况和预算草案的审查结果报告、3省(市)15份决算草案的初步审查报告的文本作为评估对象,评估结果显示,党的十八大以来,各省份在预算审查监督的法律完善、监督机构的职能建设和能力提升、监督审查程序的规范和健全等方面,已取得了长足的发展.但总的来说,这些改革仍大多属于技术性、操作层面的改革,省级人大预算监督效力提升的成效仍然不大.人大及其常委会对预算审查监督仍只是程序性的,在预算周期的规划阶段和实施阶段所起的监督作用依然较弱.为加快人大预算监督从形式向实质转变,建议以地方试点推动预算监督实质性改革、以技术手段拓展预算监督的深度与广度、加强预算审查监督队伍建设,全面提升执行能力.     

An optimal rule for patent damages under sequential innovation

We analyze the optimal design of damages for patent infringement when a follow‐on innovator may infringe the patent of an initial innovator. We consider damage rules that are linear combinations of the popular “lost profit” (LP) and “unjust enrichment” (UE) rules, coupled with a lump‐sum transfer between innovators. Such linear rules can sometimes induce the socially optimal levels of sequential innovation and the optimal allocation of industry output. The optimal linear rule achieves the highest welfare among all rules that ensure a balanced budget for the industry, and often secures substantially more welfare than either the LP rule or the UE rule.     

Measuring Compliance with the Golden Rule

The golden rule of public finance is based upon the notin that intergenerational equity requires that the cost of public expenditures be spread over time in a manner that reflects the intertemporal distribution of the benefits generated by those expenditures. This is often translated into a rule that the budget be structurally balanced in accrual accounting terms. This article considers the form of accrual accounting that is most suited to the task of measuring the consistency of fiscal policy with the golden rule. It recommends a combination of the real capital maintenance approach (also known as ‘current purchasing power accounting’) and annuity depreciation. Such an approach differs from ‘current cost accounting’, which has dominated public sector models of accrual accounting in recent years. The meaning of balance-sheet measures is also considered, and it is concluded that the golden rule is more appropriately expressed as an accrual balanced budget requirement than as a requirement for the maintenance of constant net worth. JEL classification: H6, M40.     

Does the Mandatory Bid Rule Add Value to Target Shareholders?

I investigate whether implementation of the mandatory bid rule—the rule that grants all shareholders the right to participate in a takeover transaction at equal terms—affects target announcement returns. I use a difference‐in‐differences approach and the staggered adoption of the rule across 15 European countries. I find that the rule change leads to higher target returns. In full transactions, better accounting standards and shareholder protection norms of the acquirer leads to higher target returns. In majority transactions, greater value transfer from acquirers with weak accounting standards leads to higher target returns. I find weak evidence of overpayment by acquirers.     

Amalgamation,free-rider behavior,and regulation

Amalgamation incentivizes municipalities to increase public debt because it allows them to subrogate their repayment and interest burden on the entire municipality after amalgamation. Smaller municipalities, in particular, tend to accumulate public debt in order to free-ride. Previous studies have shown this kind of opportunistic behavior in countries where municipalities can issue bonds freely in the market. However, in Japan, municipalities cannot issue bonds freely by regulation. When such regulation controls debt accumulation by the merging municipality, the free-rider effect should be weak. This study examines the relationship between the regulation of local government borrowing and free-rider behavior of Japanese municipalities. The difference-in-difference regression results confirm the existence of a free-rider effect in this regard. Moreover, the debt expenditure ratio, the index of the regulation of local public bond issues, has the same effect that prevents local public debt from increasing for both merging and never-merged municipalities. This fact shows that a merging municipality with a free-rider incentive cannot increase local public debt to excess by using the regulation. Therefore, the average free-rider effect per capita is approximately 7 % of the average local public debt per capita for the end of the pre-treatment period. This result is considerably lower than the effects of the Swedish cases.     

Implementation by Gradual Revelation

We investigate the feasibility of implementing an allocation rule with a gradual‐revelation mechanism in which agents reveal their private information over time (rather than all at once). With independently distributed types, private values, and transferable utilities satisfying a single‐crossing property, an ex‐post monotonicity condition is sufficient for budget‐balanced implementation of any incentive‐compatible allocation rule with any gradual‐revelation scheme. When we extend the single‐crossing property over the set of randomized allocations, a weaker monotonicity condition is necessary and sufficient for budget‐balanced implementation by gradual revelation.     

Fails‐to‐Deliver before and after the Implementation of Rule 203 and Rule 204

We study the determinants of fails‐to‐deliver in the period before and after the implementation of Rule 203 (elimination of option market maker exception from the locate and close‐out requirement) and Rule 204 (t+3 close‐out rule) in September 2008. We find a positive relation between short selling and fails‐to‐deliver that weakens after the implementation of these rules. Fails‐to‐deliver are higher for stocks with low institutional ownership, low book‐to‐market, small market capitalization, high turnover, and put option availability. The relation between short selling and these measures of borrowing costs is also weaker after the implementation of these rules.     

跨期总额控制、预算执行规则弱化与辖区公共支出绩效

本文采用2008-2017年中国31个省级辖区的面板数据,在区分经常性与资本性地方公共支出的基础上,代表性地考察了社会治安、社会保障、环境保护、基础设施建设四类以结果导向为主的公共支出绩效指标体系,并以财政资金使用非遵从度与跨期财政支出总额控制指数两个核心指标分别描述短期预算执行规则弱化与跨期财政支出总额控制,进而运用广义矩估计(GMM)方法展开实证研究。结果显示:(1)短期预算执行规则弱化对财政经常性支出与资本性支出的绩效影响截然相反。(2)跨期财政支出总额控制的严格约束对促进经常性与资本性支出绩效的提高起到相似的推动作用。(3)跨期财政支出总额控制与短期预算执行规则弱化对财政经常性与资本性支出绩效存在不同的交互效应。     

Compensation design and political risk: the case of city managers

Although theory suggests its importance, empirical evidence on the relation between exogenous termination risk and contracted compensation packages is limited. This study takes a different approach by exploring determinants of contracted annual compensation and severance packages for city managers. Results indicate that managers exposed to greater exogenous political risk— i.e., those employed by municipalities where voters are more likely to recall elected officials—are 6 %–11 % more likely to receive severance, and receive, on average, 12 %–24 % more severance pay, but do not receive more annual compensation. Additional analyses suggest that the relation between contracted municipal severance and political risk primarily exists in states without restrictions on voters’ ability to file recalls and in municipalities with strong public sector unions. Findings also suggest that municipalities with greater expected agency problems between managers and citizens offer significantly more contracted annual compensation and severance pay.     

Design of public procurement auctions: evidence from cleaning contracts

We analyze a regime change from beauty contests to first‐price sealed‐bid and scoring auctions, using Swedish data on public procurement of cleaning services. In beauty contests, the lowest bid often lost, leaving substantial money on the table. The procurement costs were similar before and after the regime change: (i) Entry strongly decreases the procurement cost but did not change. Entry would have decreased had the municipalities not adjusted the objects of auctions. (ii) Municipalities favored in‐house suppliers in the old regime, leading to more aggressive bidding by others. With favoritism reduced, these changes balanced each other out.     

What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU

Fiscal rules, such as the excessive deficit procedure and the stability and growth pact (SGP), aim at constraining government behavior. [Milesi-Ferretti, G., 2003. Good, bad or ugly? On the effects of fiscal rules with creative accounting, Journal of Public Economics, 88, 377–394] develops a model in which governments circumvent such rules by reverting to creative accounting. The amount of this depends on the reputation cost for the government and the economic cost of sticking to the rule. We provide empirical evidence of creative accounting in the European Union. We find that the SGP rules have induced governments to use stock-flow adjustments, a form of creative accounting, to hide deficits. The tendency to substitute stock-flow adjustments for budget deficits is especially strong for the cyclical component of the deficit, as in times of recession the cost of reducing the deficit is particularly large.     

Insider sales based on short-term earnings information

I find strong evidence of insiders selling shares prior to imminent bad earnings news through their Rule 10b5-1 trading plans. While Rule 10b5-1 selling plans may conjure images of regular selling over a sustained period of time, I find that insiders’ sales under these plans often consist of a small number of sales (the median plan consists of four sales) and commonly occur over a short period of time (the median plan lasts less than 150 days). Abnormal stock returns, earnings surprises, and abnormal earnings announcement returns are all significantly negative following plans that are short-term in nature, but not following plans that are long-term in nature. Although Rule 10b5-1 does not specify a minimum length for selling plans, finding that sales within short plans significantly outperform sales within longer plans suggests that restrictions on plan length would reduce the incidence and appearance of informed selling through Rule 10b5-1 plans.     

Minimum consumption and transitional dynamics in wealth distribution

This paper investigates quantitatively how initial wealth holding differences across households are propagated through time in a one sector growth model economy. A key feature of the model is that household consumption cannot fall below a positive level each period. The existence of a minimum consumption requirement implies that the Intertemporal Elasticity of Substitution not only differs across households but also changes differently over time. This model is calibrated to match some key aggregate statistics of the U.S. economy. We find that, as in the data, the wealth distribution in our benchmark model economy exhibits a (brief) period of increasing inequality, a short period in which inequality diminishes and a steady level of inequality along the balanced growth path. However, our model illustrates that the evolution of inequality is very sensitive to the length of the transition path. Additionally, our model predicts an upsurge in wealth inequality following the productivity slowdown in the 1970s.     

Electronic payment,natural environment and household consumption: Evidence from China household finance survey

In this paper, whether and how electronic payment affects households' consumption decisions are discussed. Data of China Household Finance Survey from 2011 to 2017 are adopted to carry out empirical tests. It is found that electronic payment would significantly induce households to consume more in discretionary goods. The potential mechanism lies in that the electronic payment cuts down transaction costs of venturing out or carrying banknotes that may hinder consumption. Using the weather conditions near the household location, this paper finds that the electronic payment would increase a household's discretionary consumption more significantly when the rain is heavy or the sunshine is weak. But necessary consumption like medical care is unaffected. It is found that electronic payment increases consumption more significantly in urban, well-educated and young households.     

债务杠杆、财务脆弱性与家庭异质性消费行为

本文通过引入财务脆弱性来描述家庭无法及时或完全履行偿债义务而发生的财务困境,实证分析了债务杠杆对家庭消费的异质性影响。理论机制分析和基于中国家庭金融调查(CHFS)数据的实证研究表明,家庭债务杠杆会提升财务脆弱性,从而弱化跨期消费平滑能力,强化消费预算约束,导致家庭落入“高边际消费倾向、低消费支出水平”的低层次消费路径上。进一步分析发现,对于通过负债投资多套房的家庭而言,高债务杠杆会明显增加不确定冲击下的财务脆弱性,进而对消费产生更大的抑制效应;亲友民间借贷的履约机制相对灵活,可以缓解财务脆弱性对家庭消费的抑制效应;债务杠杆上升引致的财务脆弱性,对耐用消费品支出的压缩效应大于非耐用消费品,对农村家庭消费支出的挤占效应大于城镇家庭。本文的研究为我国“不宜依赖消费金融扩大消费”“规范发展消费信贷”等提供了理论解释,对金融服务促进消费发展具有一定政策启示。     

Do sell-side analysts exhibit differential target price forecasting ability?

We examine the overall and individual analyst performance of 12-month-ahead target price forecasts over the 10 years from 2000 through 2009. Implied target price-based returns exceed actual returns by an average of 15 %, and absolute target price forecast errors average 45 %. At the end of the 12-month forecast horizon, only 38 % of target prices are met, but 64 % are met at some time during the forecast horizon. We find statistically significant but economically weak evidence of persistent differential abilities by sell-side analysts to forecast target prices. Target price announcement period return analyses indicate no differential market reactions to analysts’ target price revisions conditional on their recent target price forecast performance. This finding is consistent with the market understanding that analysts have, at best, limited abilities to persistently provide accurate target price forecasts.     

Generalizing the permanent-income hypothesis: Revisiting Friedman's conjecture on consumption

Friedman's contribution to the consumption literature goes well beyond the seminal permanent-income hypothesis. He conjectured that the marginal propensity to consume out of financial wealth shall be larger than out of “human wealth”, the present discounted value of future labor income. I present an explicitly solved model to deliver this widely noted consumption property by specifying that the conditional variance of changes in income increases with its level. A larger realization of income not only implies a higher level of human wealth, but also signals a riskier stream of future labor income, inducing a higher precautionary saving, and thus giving rise to Friedman's conjecture. Appropriately adjusting human wealth for income risk, I show that Friedman's conjecture may be formulated as a “generalized” permanent income hypothesis. I further show that Friedman's conjecture captures the first-order effect of stochastic precautionary savings. Finally, I propose a natural decomposition of the optimal saving rule to formalize various motives for holding wealth as emphasized in [Friedman, M., 1957. A Theory of the Consumption Function. Princeton University Press, Princeton].