Real time uncertainty in fiscal planning and debt accumulation in the euro area

Using real time data from the OECD this study explores euro area fiscal policies since the late 1990s. The results indicate that in the so-called periphery countries (Greece, Ireland, Italy, Portugal and Spain) ex ante fiscal plans have been more sensitive to economic cycles in the countercyclical direction than in the other euro area countries. Accumulated debt ratios in the periphery reflect high initial debt ratios, underlying deficit biases and cumulated errors in the data on macroeconomic imbalances. Overall, reliable statistics, balanced macroeconomic developments and longer-term policy orientation are crucial for sound and sustainable public finances.     

Determinants of public debt maturities

Summary This paper studies financing strategies which underlie the maturity structure of the public debt. Three important objectives for domestic public debt management are distinguished: interest cost reduction, economic stabilization and economic neutrality. The strategies which can be associated with these objectives are incorporated in a simple debt management model, which has been tested empirically for the case of The Netherlands. Variations in debt maturities between 1960 and 1985 appear to be related to changes in capital market conditions, investment preferences and expected real interest rates.I would like to thank Jakob de Haan, Victor Halberstadt, Robert Haveman, Jeroen Kremers, Gusta Renes, Ben van Velthoven and two referees for valuable comments. Research assistance by Marlies Pel is gratefully acknowledged.     

Fiscal sustainability across government tiers

This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of debt consolidation, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances.     

Africa's clientelist budget policies revisited: public expenditure and employment in Kenya,Tanzania and Uganda, 1960–2010

What can be learned about policy prioritization in Africa by examining long‐run trends in public expenditure and employment? Many have contended that Africa's post‐colonial leaders pursued economically unproductive budget policies that prioritized the growth of their patronage networks over socially beneficial spending, resulting in bloated payrolls, persistent deficits, and a large rent‐seeking public service. Using a purpose‐built dataset of annual public expenditure and employment series from Kenya, Tanzania, and Uganda for 1960–2010 against which to test these assumptions, this article questions whether there was anything exceptional about the growth or composition of East Africa's post‐independence expenditure. All three states grew and contracted in roughly the same periods as other regions of the world, although their contraction after 1980 was particularly marked. Industrial policy and capital investments influenced budget priorities in the early independence era, while military expenditure and debt service payments escalated in the late 1970s. The government wage bill, meanwhile, fell as a proportion of total spending over the same period. To finance employment growth while the wage bill contracted, governments allowed real wages to plummet in the 1970s–90s. In light of these external constraints and legacies, this article questions whether a budget unencumbered by patronage would have looked very different.     

The (UN)importance of public debt: A review essay

Summary In this article the debate on the consequences of the creation and existence of government debt is reviewed, using two recent books as a guideline. Four issues in particular are discussed: the correct definition and measurement of government debt, the discussion on the (in)effectiveness of fiscal policy, the inflationary consequences of public debt and finally the influence of government deficits on financial markets. It follows from our review of the debate that there exists as yet no consensus among economists on these issues.The author would like to thank Professor S.K. Kuipers, Professor J. Pen, Dr. C.G.M. Sterks and Professor J. Weitenberg for their comments on an earlier version of this paper.     

Brazilian public sector disequilibrium

The Brazilian public sector disequilibrium, as measured by growth in the global net public sector debt to GDP ratio, is examined with and without the Plano Cruzado. Two models are used, one based upon a discrete time framework and the other upon a continuous time framework, to trace paths of the debt to GDP ratio for the rest of the decade concentrating on the 1985–1986 period. Two major conclusions are reached. The first, of a theoretical nature, is that discrete time models are inappropriate in an inflationary context as they severely underestimate the inflation tax. This is evidenced by the fact that without the Plano Cruzado and an assumed inflation rate of 350%, the debt to GDP ratio grows from 1985 to 1986 in the discrete time model while it declines for this period in the continuous time model. The second is that the Plano Cruzado may put strong pressure on government finances in the near future due to the drastic fall in the inflation tax. In this case, both models show an acceleration in the growth of the debt to GDP ratio, the more drastic results appearing in the continuous model. This conclusion seems to hold true even if one allows the government to trade debt for monetary base with the consequent increase in money demand due to lower inflation, to roll over its internal debt at a lower average interest rate, or to roll over its foreign debt outstanding at a lower average interest rate.     

Sub-Saharan Africa's rising public debt stock: Is there a cause for concern?

The study investigated public debt sustainability in sub-Saharan Africa (SSA) by testing the reaction of the primary balance to positive and negative shocks in public debts in a panel of 45 SSA countries. The study adopts the innovative nonlinear fiscal reaction function and the dynamic panel threshold model to account for the potential asymmetric phenomenon in the public debt series. In line with extant studies, the study found that public debts in SSA are weakly sustainable and there is a highly procyclical fiscal policy bias in SSA countries, particularly in resource-rich countries, indicating that governments' fiscal policy responses are expansionary during economic upturns and contractionary during recessions, which may aggravate recessions and worsen debt situations across SSA. For robustness, the study compares the results with emerging and developed economies. The results indicate that in advanced economies, public debt is sustainable and that fiscal policy response is countercyclical. The research and policy implications are discussed.     

Effects of Exchange Rates on Debt, Debt Services and Public Debt Management in Thailand in the 1980s

This paper attempts to evaluate the effects of exchange rates on debt, debt services, and public debt management in Thailand in the 1980s. A simple differentiation technique is used to decompose the changes in debt and debt services into 'management' and 'exchange rates' effects. The latter became more pronounced in the second half of the 1980s largely because of the increased volatility in exchange rates among key currencies. The public sector responded to these changes by adjusting the debt portfolio through new commitment and refinancing, as well as restricting the level of external debt. As a result, a significant amount of debt services was saved in 1989, when the exchange rates among major currencies began to settle down, although the same adjustments initially led to temporary increases in the levels of debt and debt services during the mid-1980s.
Moreover, the diversified structure of public external debt made it possible to compensate a change of debt or debt service in one currency denomination by a counter change of those in another currency denomination. Such a compensating relationship (e.g. between Yen and US dollar during 1985–87) helped stabilise the effects of exchange rates. The baht is now pegged to a basket of currencies. In theory the effects of exchange rates may be completely neutralised if the debt portfolio reflects the weight of each currency in the basket. Such relationships may be incorporated to improve the efficiency of public debt management.     

Fiscal Policy Effectiveness in Japan

The effectiveness of fiscal policy in Japan over the past decade has been a matter of great controversy. We investigate the effectiveness of Japanese fiscal policy over the 1976–1999 period using a structural VAR analysis of real GDP, tax revenues, and public expenditures. We find that expansionary fiscal policy, whether in the form of tax cuts or of public works spending, had significant stimulative effects. Using a new method of computing policy multipliers from structural VARs, we calculate that the multiplier on tax cuts is about 25% higher at a four-year horizon than that on public works spending, though both are well in excess of one. A historical decomposition reveals that Japanese fiscal policy was contractionary over much of the 1990s, and a significant proportion of the variation in growth can be attributed to fiscal policy shocks; accordingly, most of the run-up in public debt is attributable to declining tax revenues due to the recession. Examining savings behavior directly, we find limited evidence of Ricardian effects, insufficient to offset the short-term effects of discretionary fiscal policy. J. Japan. Int. Econ., December 2002, 16(4), pp. 536–558. Federal Reserve Bank of New York, New York, and Institute for International Economics, Washington, DC. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E62, E65, E21.     

Debt relief and fiscal sustainability

In this paper I analyze the relationship between fiscal policy,aggregate public sector debt sustainability, and debt relief. I develop a methodology to compute the fiscal policy path that is compatible with aggregate debt sustainability in the post-HIPC era. The model explicitly considers the role of domestic debt and quantifies the extent to which future debt sustainability depends on the availability of concessional loans at subsidized interest rates. The working of the model is illustrated for the case of Nicaragua, a country that in 2002 had one of the highest net present value of public external debt to GDP ratios. JEL no. F3, F34, F35.     

Sustainability of the fiscal imbalance and public debt under fiscal policy asymmetries in Sri Lanka

This paper investigates the sustainability of Sri Lanka’s fiscal imbalance and public debt. To test for sustainability of the fiscal imbalance, the study applies a symmetric ARDL (autoregressive distributive lag) technique to estimate a government intertemporal budget constraint. And to test for sustainability of public debt, it applies an asymmetric ARDL technique to estimate a fiscal reaction function, which allows for differential responses in the primary budget balance depending on whether shocks to regressors are positive or negative. Annual data for the period 1961–2018 are used in the estimations. The results indicate that Sri Lanka’s fiscal management is inconsistent with strong form sustainability, which requires that expenditures not grow faster than revenues. However, estimation of the fiscal reaction function finds robust evidence for fiscal policy asymmetries. Evidence emerges that Sri Lanka’s fiscal policy stance is procyclical with strong stabilization tendencies in economic expansions that are not sustained in contractions. Against upsurges in the debt-to-GDP ratio, authorities are found to pursue fiscal consolidation, thus suggesting weak form sustainability.     

Interest-Rate Spread and Public-Debt Dynamics in a Two-Country Monetary-Union Portfolio Model

Tracking, monitoring and steering the evolution of public debt over time will be a major policy challenge for almost all governments in the advanced countries in the years to come, in particular for those belonging to the European Monetary Union. In this paper I study public debt dynamics in a two-country monetary union where a representative, risk-averse wealth-owner optimizes his/her portfolio of sovereign bonds issued in the common currency. I obtain two main results with respect to the standard country-by-country approach. First, the interest-rate spread between the two countries is endogenized as the higher-debt country pays a risk premium which is proportional to the level of its own debt with respect to the debt of the other. Second, its debt dynamic path becomes nonlinear and dependent on the evolution of the other country’s debt. The most important policy implication is that “dynamic interdependence” is not fully considered in the implementation of EMU fiscal rules, but it may may jeopardize their goal of convergence and stability of debt stocks.     

The shift from sterling to the dollar, 1965–76: evidence from Australia and New Zealand

The management of foreign exchange reserves has recently attracted attention from both policy‐makers and historians. Historical research has focussed on the nineteenth century and the interwar period, with less attention to the strategies of smaller countries in the final transition from sterling to the dollar in the post‐1945 period. This article examines the evolution of reserve currency policy from the perspective of Australia and New Zealand in the 1960s and early 1970s. As in the 1930s, economic uncertainty and a shift in global economic power prompted changes in reserves strategy. Patterns of trade and debt and falling confidence in British economic policy prompted a move away from sterling, but the timing and extent of this transition were affected by the fragility of the sterling exchange rate, lack of alternative assets, and continued dependence on the London capital market. The choices for Australia and New Zealand were thus constrained, but they were able to leverage their position as holders of sterling to engage in agreements that provided an exchange rate guarantee for their sterling holdings and continued access to the London capital market. This mitigated the effect of the final global transition from sterling to the dollar while protecting their interests.     

Sustainability of public debt: evidence from Japan before the Second World War1

Japan defaulted on its public debt after the Second World War. This article addresses the question of how Japan lost its ability to sustain its public debt. We explore the sustainability of public debt in Japan before the War. We conduct statistical tests for the relationship between public debt and primary fiscal balance, and find that Japanese public debt was sustainable until 1931, and unsustainable in and after 1932. Narrative modes of analysis indicate that Japan lost its fiscal discipline because of the military's effective veto over budgetary processes and because of the absence of pressure for sound fiscal policy from international financial markets.     

Current Account and Fiscal Policy in Japan: 1885–1991

This paper explores the empirical relationship between the current account balance and macroeconomic series for the Japanese economy over the years 1885–1991. The long-run equilibrium depends on which series (public debt or budget deficits) affects assets relative to a capital stock rate. Departing from the Ricardian Equivalence structure (no bequest motives), fiscal policy in Japan is shown to be more related to the current account when policy is introduced by shifts in tax revenues rather than by changes in national debt.     

Fiscal and monetary policy in a monetary union: Credible inflation targets or monetized debt?

Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetized Debt? —The paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank sets the nominal interest rate and responds to rising government debt/GDP ratios by monetization. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if the governments bear sole responsibility for solvency, but the public sector remains excessively large. The best scenario occurs if the central bank removes the incentive for the governments to engineer surprise inflation by credible inflation targeting.     

Ageing and the Conflict of Interest Between Generations

The ageing of the population imposes a considerable burden on long-term public finances in most industrialized countries. Generational accounting has been used across the world to assess the generational imbalance associated with current public policies. In this study, we incorporate Dutch generational accounts in an open economy overlapping generations model to assess the sustainability gap in current Dutch public finances. Our central estimate of the gap is 4.5% of gdp, but the paper also shows the sensitivity of this result. We explore a variety of policy reforms to reduce the sustainability gap, thereby presenting the impact on the intergenerational distribution of the net benefit from government.     

管理人员的综合测评方法研究

随着国债规模的扩大和国债政策市场化、长期化趋势的确立 ,优化国债融资成本的迫切性日益突出。针对我国国债市场的非市场化结构特征 ,我们提出以市场化为核心的优化国债市场结构和筹资成本的思路 ,并通过理论与实证分析相结合的方法探讨优化国债融资成本的较佳途径     

现代“公债”概念的生成及其在晚清民初的流播

中国古代曾有国家举债之事,但无论是从观念还是制度上看,都并非现代财政意义上的“公债”。经过相关人士的译介,现代财政意义上的“公债”概念渐为晚清社会所知晓。“公债”的词义亦经历了由古至今与中西交汇的转换与融合演进过程。“公债”概念形成与演进的过程,同时也是清廷财政变革的实践过程。甲午战后,朝野逐渐对公债举借背后所关涉的国家财政制度、债权关系、国家信用等问题进行了较为深入的讨论。晚清民初,现代意义的“公债”概念以及知识与制度体系逐步被塑造和建构起来。在国家财政制度剧烈转型之时,清廷亦展开了公债发行的艰难尝试与制度移植。     

Unsustainable sovereign debt—is the Euro crisis only the tip of the iceberg?

As a direct effect of the financial crisis in 2008, public debt began to accumulate rapidly, eventually leading to the European sovereign debt crisis. However, the dramatic increase in government debt is not only happening in European countries. All major G7 countries are experiencing similar developments. What are the implications of this kind of massive deficit and debt policy for the long term stability of these economies? Are there limits in debt-ratios that qualitatively change policy options? While theory can easily illustrate these limits, where are these limits in real economies? This paper examines the relationship between sovereign debt dynamics and capital formation, and accounts for the effects of the 2008 financial crisis on debt sustainability for the four largest advanced economies. We contribute to the literature on fiscal sustainability by framing the problem in an OLG model with government debt, physical capital, endogenous interest rates, and exogenous growth. For the calibration exercise we extract data from the OECD for Germany as a stabilization anchor in Europe, the US, the UK, and Japan for almost two decades before the 2008 crisis. Except for intertemporal preferences, all parameters are drawn or directly derived from the OECD database, or endogenously determined within the model. The results of the calibration exercise are alarming for all four countries under consideration. We identify debt ceilings that indicate a sustainable and unsustainable regime. For 2011 all four economies are either close to, or have already passed the ceiling. The results call for a dramatic readjustment in budget policies for a consolidation period and long-term fiscal rules that make it possible to sustain sufficient capital intensity so that these economies can maintain their high income levels. Current conditions are already starting to restrict policy choices. However, the results also make it very clear that none of these economies would survive a second financial crisis such as the one in 2008.