Assessing structural change: the case of Austria

In recent years in many OECD countries the view became popular that a country has a healthy industrial structure if it has a high share of high-tech industries and a low share of traditional industries like textiles and steel. Therefore, industrial policy in these countries introduces programmes for reallocating from traditional sectors to high-tech sectors in order to increase national welfare. This paper questions this view by taking into account recent insights of international trade theory and shows, in the case of Austria, why conventional concepts of measuring and assessing structural change (used, e.g. by the OECD) are misleading and thus lead to wrong conclusions in the assessment whether structural adjustment has gone in the ‘right’ direction. More specifically, the ‘popular’ criteria ‘share and shift’, ‘high-tech versus traditional products’, and ‘R & D intensity’ are discussed and an alternative interpretation suggested by economic theory is given. Additionally, the paper illustrates the alternatie interpretation of these popular criteria on the example of the textile industry which, as a traditional consumer goods industry, managed to modernize largely without R & D of its own and was able to meet international competition successfully.     

Uncertainty in the public debt market and stochastic long-run growth

In a continuous time model, a representative household has to allocate its investment and consumption in an optimal manner under conditions of uncertainty. In the present study it is hypothesized that there are two types of assets: a risk-free and a risky asset. The risk-free asset is assumed to be the physical capital, while at the same time uncertainty is allowed to result from the exogenous random variations in the public debt market, rendering in this way government bonds to act as the risky asset. In the endogenous growth framework with productive public investment, the expected long-run growth rate, the dynamic path of consumption as well as the optimal allocation of investment between a risky and a riskless asset, are analytically derived. This kind of treatment allows us to create a locus for the long-run growth over the various levels of uncertainty. The outcome of the analysis is that a rise in uncertainty impacts negatively upon the long-run growth rate. In order to empirically assess the relationship between growth and uncertainty, we lay our emphasis on the US economy for the period 1957:1 to 2008:4. Within the framework of a bivariate BEKK–GARCH(1,1)-M model a significant negative relationship between uncertainty and economic growth has been established.     

Corruption and public debt: a cross-country analysis

Using data from a large panel of countries over the period 1995–2015, this article empirically investigates the effect of corruption on public debt. Overall, the estimates reveal that corruption increases public debt. The effect, however, appears to be heterogeneous across income-related sample splits: it is stronger for advanced economies, but weaker and less statistically robust for less-developed countries, where external factors such as foreign aid may also affect public debt. The analysis suggests the inadequacy of conventional wisdom assuming that more detrimental fiscal effects of corruption arise in low-income countries.     

Inequality and public debt: A positive analysis

This study extends the multi‐country, politico‐economic model of fiscal policy to incorporate wage inequality within each country. In this extended framework, we present conflict over fiscal policy within and across generations and show that a low‐inequality country realizes tight fiscal policy with low public debt accumulation, whereas a high‐inequality country experiences loose fiscal policy with high public debt. This model prediction is consistent with empirical evidence from OECD countries for the years 1980 to 2010.     

The political economy of public debt

Public debt (as opposed to current taxation) alters the inter-temporal pattern of tax rates??it reduces current rates and increases future rates. Accordingly, whether the share of the cost of a given public expenditure is reduced or increased by debt for a given individual depends on the time profile of that individual??s income (tax base) vis-à-vis others?? incomes. Therefore, given the age-profile of income in virtually all Western countries, individuals will tend to be better off under current taxes the younger they are. If (as most standard models of political economy assume) individuals vote according to their economic interests, and if they are tolerably well-informed, then the pattern of support for public debt will track age. And increases in the median age of the population will lead to larger public debt. In other words, public debt policy collapses to a kind of demographic politics. This explanation may, however, be sensitive to assumptions about motives for bequest. Specifically, if bequestors seek to leave positive bequests and are motivated exclusively by the lifetime consumption of their heirs (as well as themselves) then the aged may, under plausible assumptions about the age of their heirs, prefer current taxes over debt.     

Thomas Jefferson on the repudiation of public debt

Thomas Jefferson's theory of public debt repudiation illustrates both the normative and positive aspects of public debt repudiation. Using Jefferson's model, this paper attempts to reveal several characteristics of public debt repudiation. First, that the positive characteristics of repudiation can not be analyzed apart from the normative and institutional issues. Second, how a debt repudiation rule might be incorporated into a country's constitution and, finally, how such a rule may lead to an improvement of the country's credit terms over those that would exist otherwise. In other words, a country may be better off announcing its standards for repudiation then if it denied any intention to repudiate under any conditions. A related issue, which is beyond the scope of this paper, is the sufficient conditions for repudiation. Jefferson's model develops only the necessary conditions. I would like to thank J. Richard Aronson, Wayne Brough, Dean Crawshare, James Dearden, Kenneth Greene, Vince Munley, the anonymous referees, and seminar participants at the 1990 Public Choice Society meetings and at Lehigh University for helpful comments and suggestions. Of course, the author is responsible for any errors. The author is grateful to The Martindale Center for the Study of Private Enterprise which supplied research support.     

Optimal foreign debt for Egypt: A stochastic control approach

This study assesses the foreign debt policy in Egypt and contrasts it versus the optimal policy during the period 1985–2008. It also presents a forecast of the optimal debt during the period 2009–2014. The optimal debt policy was derived using an open economy model for Egypt. The uncertainties in the model stem from the uncertainties in the interest or debt service payments and the uncertainties in the rate of return on investments. The stochastic control approach was used to find the optimal debt policy. It was found that Egypt could borrow externally as long as the trend in the rate of return on investments exceeds the trend in the real interest rate or the trend in the rate of the debt service payments. The analysis finds that Egypt's foreign debt was higher than the optimal level before 1997. After 1997, foreign debt seems to converge to the optimal level. However, Egypt's foreign debt is still below its optimal level which results in an opportunity cost for the economy to grow, otherwise, GDP could have recorded a favorable increase.     

Using inflation to erode the US public debt

Projections indicate the US Federal debt held by the public may exceed 70–100% of GDP within 10 years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6%. Inflation reduced this ratio by more than a third within a decade. Yet there are some important differences – shorter debt maturities today reduce the temptation to inflate, while the larger share of debt held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the US debt overhang may induce an increase in inflation of about 5% for several years that could significantly reduce the debt ratio.     

Partially sighted persons and the public debt elephant

Recent data on the accumulation patterns of public debt across OECD countries suggests a synthesis is possible between the theoretical and empirical approaches to public debt and also between the traditional and more recent political economy explanations of public debt accumulation. The inductive approach of recent political economy explanations is combined with the intertemporal constraints highlighted in the Ricardian–Barro theory to present a reinterpretation of cross-country debt accumulations patterns. Like the elephant in the blind men and the elephant fable, the conclusion is glaringly obvious. Formal and informal budgetary constraints matter.

Sustainability of Austrian public debt: a political economy perspective

Sustainability of Austrian public debt is investigated in the context of political objectives such as stabilizing the business cycle, increasing chances for being re-elected and implementing the ideologies of political parties. Several tests indicate that Austrian fiscal policies were sustainable in the period 1960–1974, while from 1975 on, public debt grew much more rapidly. The development of public debt in Austria seems to be driven not primarily by ideology, but by structural causes and a shift in the budgetary policy paradigm. We find some empirical evidence that governments in Austria dominated by one party run higher deficits than coalition governments. There are no indications of a political business cycle.     

On the relationship between fertility and public national debt

Public debt and fertility are two issues of major concern in the current economic policy debate, especially in countries with below-replacement-fertility and large debt (which appears further enlarged as a consequence of the recent world financial distress 2008–2009). In this paper we show that, at the steady state, public debt is in general harmful for fertility, in that debt issuing almost ever crowds fertility. The relationship is however reversed if debt is sufficiently low and the share of capital (labor) in the economy is sufficiently low (high). Hence, our analysis would recommend that developed, capital intensive economies (such as OECD countries) aiming at a fertility recovery should reduce national debt, while developing, labor intensive economies, aiming at reducing fertility, should increase (reduce) national debt only if they are debt virtuous (vicious).     

Economic restructuring and the debt problem: the Greek case

The Greek postwar economic development process clearly illustrates the links between the debt explosion, that many countries in the periphery and semi-periphery face at the moment, and the strategy of free-market economic restructuring. It is argued that both the balance of payments and the budget deficits, which fuelled the Greek debt explosion in the 1980s, have been heavily conditioned by structural problems that are directly related to the development strategy adopted by the Greek ruling élite. In the absence of radical structural changes, a new stop–go cyclical pattern tends to become a permanent feature of the development process: debt-led growth followed by Stabilization Programmes to secure the external debt servicing     

The weight of the median voter ageing on public debt

This paper studies the relationship between an ageing society and voter preference for financing public expenditures with debt versus income taxation. We focus on advanced economies and OECD members where ageing is relatively severe, the political process is more democratic, and economic institutions are subject to electorate scrutiny. Since there are no international data sources available for the median voter age, one of the contributions of this paper is the construction of a median voter series for the countries included in the study. The sample period covers 30 years, from 1980 to 2010. The panel estimates confirm the Brennan hypothesis (Const Polit Econ 23(3):182–198, 2012). A 1-year ageing of the median voter increases the public debt to GDP ratio by on the order of 4.5 percentage points.     

Boundedness and nonlinearities in public debt dynamics: A TAR assessment

This study aims to investigate the dynamics of public debts over more than four decades for two of the main developed countries: the USA and the UK. To do this, we apply nonlinearity tests and threshold models. While the first tests enable us to check for further changes in the data, threshold models are required to assess the switching-regime hypothesis and to apprehend the main changes in public debts through different regimes. Our results provide several interesting findings. First, for both countries, we noted several structural breaks associated with well-known economic downturns, oil shocks, debt crises and financial crashes. Second, public debt dynamics seem to be characterized by various threshold effects that can improve the modeling and forecasting of public debt evolution. It is important to note that public debts vary significantly according to the regime and that a regime can be induced by specific macroeconomic factors. Keeping a close eye on such factors may help economists and policymakers to better control future public debt evolutions.     

Fiscal adjustment and the costs of public debt service: evidence from OECD countries

We use a panel of 21 OECD countries from 1970 to 2009 to investigate the effects of different fiscal adjustment strategies on long-term interest rates – a key fiscal indicator reflecting the costs of government debt service. As Europe’s sovereign debt crisis has shown, governments confronted with high deficits and rising debt may be forced to enact fiscal adjustments in order to avoid increasing market pressure and solvency problems. Over the last four decades, such measures taken by governments in OECD countries have varied in duration, size, composition and in their success to re-establish fiscal sustainability. We find that large and expenditure-based adjustments lead to substantially lower long-term interest rates. Small and revenue-based measures do not have an effect on interest rates. Financial markets thus only seem to value strict and decisive measures – a clear sign that the government’s pledge to cut the deficit is credible.     

Tax competition and the political economy of public employment: a model for Austria

In this work, we simulate the effects of the tax autonomy of the Austrian states on the levels of public employment in each state. We show that depending on the strength of the public sector lobby, tax autonomy would require a reduction of employment in the public sector of between 25 and 35% of the current level. We also show that tax autonomy increases welfare levels by 1–1.5%; that is, the positive change in the disposable income of the workers more than offsets the welfare loss resulting from the lower provision of public goods. Finally, we show that the reduction of public employment is superior in terms of welfare to an alternative scenario in which employment levels are held constant but the wage levels in the public sector are adjusted.     

The 90% public debt threshold: the rise and fall of a stylized fact

We put the original Reinhart–Rogoff data-set, made public by Herndon et al. (2013), to a formal econometric test to identify public debt thresholds endogenously. We show that the nonlinear relation between debt and growth is not robust. Taken with a pinch of salt, our results suggest, however, that a negative association between central government debt and growth may set in at debt levels as low as 20% of GDP. Further (and greater) thresholds may exist, but their magnitude is uncertain. For general government debt, the threshold is considerably higher at about 50%. Country-specific estimates reveal a large amount of cross-country heterogeneity. For some countries including the United States, a nonlinear negative link can be detected at about 30% of GDP. For others, no nonlinearities can be established. Our results are a formal econometric confirmation that the 90% public debt threshold is not in the Reinhart–Rogoff data. But our results also seem to suggest that public debt be associated with poor economic performance at fairly moderate public debt levels. The absence of threshold effects or low estimated thresholds may not preclude the emergence of further threshold effects, especially as public debt levels are rising to unprecedentedly high levels.     

An empirical characterization of the effects of public debt on economic growth

Based on a data set of 115 economies, this article empirically investigates the relation between public debt and economic growth. Using the World Bank’s classification for income groups, we initially find that those countries that present the lowest public debt are characterized by the highest economic growth, while the smallest growth rates are associated with the highest public debt. Nevertheless, this conclusion is tempered when we analyse the countries by income level: low-income countries have a different behaviour with respect to lower-middle, upper-middle and high-income countries. When using the IMF’s country classification, the results do not suggest a clear pattern in the public debt–economic growth nexus across different countries, but indicate a heterogeneous relationship between such key macroeconomic variables.