THE SYSTEMATIC RISK OF DEBT: AUSTRALIAN EVIDENCE*

This paper examines systematic risk (betas) of Australian government debt securities for the period 1979–2004 and makes three contributions to academic research and practical debate. First, the empirical work provides direct evidence on the systematic risk of government debt, and provides a benchmark for estimating the systematic risk of corporate debt which is relevant for cost of capital estimation and for optimal portfolio selection by asset managers such as superannuation funds. Second, analysis of reasons for non‐zero (and time varying) betas for fixed income securities aids understanding of the primary sources of systematic risk. Third, the results cast light on the appropriate choice of maturity of risk free interest rate for use in the Capital Asset Pricing Model and have implications for the current applicability of historical estimates of the market risk premium. Debt betas are found to be, on average, significantly positive and (as expected) closely related, cross sectionally, to duration. They are, however, subject to significant time series variation, and over the past few years the pre‐existing positive correlation between bond and stock returns appears to have vanished.     

THE FISCAL POLICY RESPONSE TO PUBLIC DEBT IN DEVELOPING COUNTRIES

Theoretical models on fiscal sustainability hypothesize that indebted governments can lower their current debt by generating future primary surpluses, ceteris paribus. While both developed and developing countries struggle with the issue of debt stabilization, the latter, in particular face heightened sensitivity from creditors, which provides them an impetus to respond more strongly to stabilize their debt. Based on a panel of 53 developing countries, we examine the fiscal response of these countries to changes in their debt‐to‐gross domestic product ratio. We find evidence of a positive relationship between the debt and primary surplus and that countries adjust along both the revenue and expenditure margins at roughly the same rate. (JEL E62, H50, O11)     

PUBLIC DEBT MATURITY AND CURRENCY CRISES

The theory underlying the effect of debt structure on the probability of a currency crisis and the slope of the yield curve was developed in Benigno and Missale (2004). In this paper, we provide the empirical evidence to support their model's predictions. In a dynamic panel data framework, we produce generalized method of moments estimates that give substantial support to the hypothesis that the role of short‐term debt depends on how a devaluation affects the reputation of the policymaker and the real value of public debt. In addition to the empirical analysis, we generalize the theoretical framework to allow for the presence of non‐deflatable debt and, for completeness, examine the case where the monetary authority can fully commit itself to an escape clause monetary rule.     

FISCAL POLICY RULES AND THE SUSTAINABILITY OF PUBLIC DEBT IN EUROPE*

The sustainability of public debt is interpreted as the result of the interaction of fiscal policy with the economic environment, and not as a statistical concept as in most of the recent literature. If debt is not to explode over time, policymakers have to respond to the changing conditions in the macroeconomic environment. This article defines the conditions that will ensure compliance of fiscal policy with the intertemporal budget constraint in the context of Europe's fiscal policy rules. The empirical part of the article reveals that European public debt is sustainable in this respect, but questions regarding long‐run liquidity requirements remain unresolved.     

公共资本投资、内生经济增长与合理政府债务规模*

本文基于一个具有内生增长机制的三部门世代交叠模型,讨论了政府举债为公共投资进行融资时经济的长期均衡;同时,通过数值模拟方法考察了我国的均衡政府债务规模及其影响因素。结果表明：在特定条件下,经济系统存在一个正的均衡政府债务-产出比重,该债务比重水平明显受到公共投资—产出比重、公共投资的债务融资比重、民间资本产出弹性等参数的影响。但是,均衡政府债务比重并不是无限上升的,当上述参数超过特定临界值时,经济系统无法达到均衡,政府债务-产出之比将持续上升,财政将不可持续。另外,当民间资本产出弹性较低时,较高的均衡政府债务比重可能导致经济运行动态无效率。数值模拟结果还显示,基于不同的假设情形,我国的均衡政府债务-产出比重均在不同程度上高于当前实际的政府债务规模,这为我国在未来期间实施扩张性财政政策提供了有利的依据。     

THE BEHAVIOR OF U.S. PUBLIC DEBT AND DEFICITS DURING THE GLOBAL FINANCIAL CRISIS

In this paper we test the sustainability of U.S. public debt for the period 1916–2012 by analyzing how the primary surplus to gross domestic product (GDP) responds to changes in the debt to GDP ratio in a time‐varying parameter model. Further, we determine the stationarity property of the debt/GDP ratio while accommodating possible breaks in the data caused by wars and economic crisis under both the null and alternative hypotheses of an endogenous unit root test. The results show that the U.S. public debt was sustainable until 2005 when the primary surplus to GDP reacted negatively to the debt/income ratio. This is further exacerbated during the global financial crisis when primary surpluses continued to fall with increased debt, thus jeopardizing the sustainability of fiscal policy. While the stationarity test shows that the U.S. fiscal debt/GDP ratio is sustainable, it fails to highlight the risk that its debt policy has been becoming unsustainable in recent years. (JEL H62, E62, C2)     

INCOME DISTRIBUTION, SOVEREIGN DEBT, AND PUBLIC INVESTMENT

We develop a political economy model of sovereign debt that shows that income inequality leads to popular pressures on the government to use foreign debt to finance a redistribution of income at the expense of productive public investment. Recognizing this fact, international lenders impose credit ceilings with the consequence that developing country borrowers invest less and grow slower.     

HYPERBOLIC DISCOUNTING,PUBLIC DEBT AND BALANCED BUDGET RULES

This paper considers a government that chooses its tax and borrowing policy in order to minimize the present value of the excess burden caused by taxation. In doing so, the government uses hyperbolic discounting. It turns out that public deficits are positive even if public expenditures are constant over time. With cyclical expenditures, the government chooses an asymmetric debt policy, i.e., in bad times it borrows more than it repays in good times. In contrast to tax smoothing and political economy theories of public debt, the welfare effects of a balanced budget rule are ambiguous.     

PUBLIC DEBT AND PUBLIC INVESTMENT IN AN ENDOGENOUS GROWTH MODEL WITH REAL WAGE RIGIDITIES

We present an endogenous growth model with public capital, public debt and real wage rigidities due to labor market imperfections. Assuming that the primary surplus relative to gross domestic produce (GDP) is a positive function of the debt to GDP ratio, we study growth and employment effects of deficit‐financed public investment using simulations as well as how fiscal policy affects stability of the economy. Further, we contrast the growth rate and the unemployment rate in the deficit scenario with that of the balanced budget scenario. Finally, we compare our results with those obtained in case of flexible wages and full employment.     

PUBLIC DEBT BUBBLES IN HETEROGENEOUS AGENT MODELS WITH TAIL RISK

This article studies the public debt implications of an analytically tractable class of incomplete insurance macroeconomic models in which agents face a near-zero probability of a highly adverse outcome. In generic models of this kind, there exists a public debt bubble, so that the real interest rate is perpetually below the growth rate (set to zero). There is no upper bound on the deficit level or debt level that is sustainable in a bubbly equilibrium. In a public debt bubble, ex ante steady-state welfare is higher if the government chooses policies that give rise to a larger level of debt.     

OPTIMAL CONTRACTS FOR CENTRAL BANKERS AND PUBLIC DEBT POLICY*

We consider how the second‐best allocation corresponding to an optimal rule under the policy commitment of a central bank and a fiscal authority with a consolidated government budget constraint can be achieved, even though these authorities are unable to commit themselves to their optimal policies and ignore the strategic interaction between their policies. Our results show that the best practical institutional arrangement is to have an instrument‐independent central bank that controls the money supply to determine the rate of inflation and commits itself to an inflation target that depends on fiscal variables.     

A CLOSED‐FORM SOLUTION FOR DETERMINING THE BURDEN OF PUBLIC DEBT IN NEOCLASSICAL GROWTH MODELS

This paper develops a new approach, termed as the stock approach, to calculate the steady‐state output loss caused by public debt in neoclassical growth models. The novelty of our stock approach is that it provides a closed‐form solution to the steady‐state output‐debt relationship. The main conclusion of the paper is that the steady‐state burden of public debt is country‐specific in neoclassical growth models and it decreases with the private saving rate and increases with the population growth rate, with the exception of the special case where Ricardian equivalence holds.