Determinants of the sacrifice ratio: Evidence from OECD and non-OECD countries

This paper measures sacrifice ratios for all countries in the world over an approximately forty year time period, in addition to exploring the determinants of worldwide sacrifice ratios. We test the most commonly-cited determinants: the speed of disinflation, openness, inflation targeting, central bank independence, and political factors for both OECD and non-OECD countries. We find that the speed of disinflation is the most important determinant of OECD sacrifice ratios, but puzzlingly has no effect on non-OECD nations' disinflation costs. Instead we find evidence that greater central bank independence and more openness are associated with lower non-OECD sacrifice ratios. We also find that the ratio of government debt to GDP – a variable that is not important when it comes to OECD countries – is highly significant for non-OECD economies. Specifically, we find that higher indebtedness is associated with lower sacrifice ratios in non-OECD nations, suggesting that greater levels of debt do not lead to higher expectations of inflation. Furthermore we find evidence that the negative impact of debt on non-OECD sacrifice ratios is being driven by middle income economies.     

Revisit causal nexus between military spending and debt: A panel causality test

This study revisits the causal relationship between military spending and debt burden in 11 OECD countries via a panel causality analysis that accounts for both cross-sectional dependence and heterogeneity across countries. Our empirical results indicate unidirectional causality from military spending to debt burden for Japan, Portugal, and the US; one-way causality from debt burden to military spending for both Canada and the UK; bidirectional causality for Spain; and for the rest of countries, we do not find any relationship between military spending and debt burden. The empirical evidence does not provide consistent results regarding the causal relationship between military spending and debt burden in these 11 OECD countries.     

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.     

Regime-switching effects of debt on real GDP per capita the case of Latin American and Caribbean countries

In this paper, we try to investigate how the debt and real GDP per capita relationship varies with indebtedness levels and other country characteristics in a balanced panel of 21 developing Latin American and Caribbean countries over the period 1992–2006. The empirical results indicate that there exist two threshold values of 32.88% and 55.89%. The latter is lower than the Maastricht criterion and Stability and Growth Pact of a total external Debt per GDP ratio at 60% in the OECD countries. Both thresholds divide our panel into three regimes. In the middle (stimulus) regime, the Debt per GDP ratio has a positive impact on real GDP per capita, which is consistent with the stimulus view (Eisner, 1984). However, the impact becomes negative and consistent with the crowding-out view (Friedman, 1977, 1985) in the left and right (crowding-out) regimes. Based on our findings, we find no supportive evidence for Ricardian view (Barro, 1989). Therefore, our empirical results have important implications for fiscal policymakers in these Latin American and Caribbean countries.     

Monetary Policy, Corporate Financial Composition and Real Activity

This article addresses two fundamental questions about monetarypolicy, credit conditions and corporate activity. First, canwe relate differences in the composition of debt between tightand loose periods of monetary policy to firm characteristicslike size, age, indebtedness or risk? Second, do differencesin companies’ financial compositions matter for real activityof firms such as inventory and employment growth? The articleoffers some evidence from firms in the UK manufacturing sectorwhich suggests that the composition of debt differs considerablywith characteristics such as size, age, debt and risk, it alsoshows a significant effect from financial composition and cashflow to inventory and employment growth. (JEL codes: E32, E44,E51)     

The drivers of household indebtedness reconsidered: An empirical evaluation of competing arguments on the macroeconomic determinants of household indebtedness in OECD countries

Abstract

Household debt is at a record high in most Organisation for Economic Co-operation and Development (OECD) countries and it played a crucial role in the recent financial crisis. Several arguments on the macroeconomic drivers of household debt have been put forward, and most have been empirically tested, albeit in isolation of each other. This article empirically tests 7 competing hypotheses on the macroeconomic determinants of household indebtedness together in one econometric study. Existing arguments suggest that residential house prices, upward movements in the prices of assets demanded by households, the income share of the top 1%, falling wages, the rolling back of the welfare state, the age structure of the population, and the short-term interest rate drive household indebtedness. We formulate these arguments as hypotheses and test them for a panel of 13 OECD countries over the period 1993–2011 using error correction models. We also investigate whether effects differ in boom and bust phases of the debt and house price cycles. The results show that the most robust macroeconomic determinant of household debt is real residential house prices, and that the phase of the debt and house price cycles plays a role in household debt accumulation.     

Is Fiscal Policy Sustainable in Developing Economies?

This paper investigates fiscal policy sustainability in Peru, the Philippines, South Africa, Thailand, and Venezuela using competing methodologies. Standard unit roots and cointegration analyses do not endorse the validity of the intertemporal budget constraint. In contrast, to varying degrees across countries, alternative testing employing a fiscal policy reaction function indicates sustainability defined as surplus adjustments in response to higher debt‐to‐income ratios. Corresponding debt‐dynamics analyses show that corrective measures were put in place to revert non‐sustainable trends in government debt. However, ancillary variables in the debt modeling produce statistically weak evidence of procyclical fiscal behavior in the Latin American countries.     

Debt and Currency Crises—Complements or Substitutes?*

Debt and currency crises are closely interlinked through the government's intertemporal budget constraint. The default tax and the inflation/devaluation tax can be considered as alternative means of financing. Our empirical analysis finds that high‐debt countries choose default rather than inflation/devaluation for financing, while a high money stock reduces the probability of debt crises. Further, we find strong evidence that debt and currency crises share common fundamental causes. Finally, there is a Granger causality running from debt crises to currency crises, but only weakly in the other direction.     

Debt Concentration and Bargaining Power: Large Banks,Small Banks,and Secondary Market Prices

Commerical bank debts of developing countries are held by large international banks and smaller domestic banks. This paper investigates how debt concentration—the proportion of a country's debt held by large banks relative to small banks—affects the secondary market price for these loans. We find that countries with higher concentrations have higher secondary-market prices. We explain this empirical finding in a bargaining model that endogenizes the maximum penalty that banks can credibly impose on a recalcitrant debtor. We show that the banks' bargaining power increases with the degree of debt concentration, thus increasing repayment and secondary-market prices.     

Currency devaluations,aggregate demand,and debt dynamics in economies with foreign currency liabilities

The article uses a post Kaleckian model to analyze how currency devaluations affect aggregate demand and capital accumulation in an economy with foreign currency liabilities in the short-run. In benchmark post Kaleckian open economy models, currency devaluations have two effects. First, they change international price competitiveness and thus affect net exports. Second, devaluations change income distribution and thereby affect consumption and investment demand. The overall effect on aggregate demand and investment is ambiguous and depends on parameter values. Existing models, however, disregard balance sheet effects that arise from foreign currency-denominated external debt. The article develops a novel post Kaleckian open economy model that introduces foreign currency-denominated external debt and balance sheet effects to examine the demand-effects of devaluations. Furthermore, the article models the dynamics of external and domestic corporate debt. It discusses how an economy may end up in a vicious cycle of foreign-currency indebtedness and derives the conditions under which indebtedness becomes stable or unstable. It shows that the existence of foreign currency-denominated debt means that contractionary devaluations are more likely, and that foreign interest rate hikes, and high illiquidity and risk premia compromise debt sustainability. Devaluations only stabilize debt ratios if they succeed in boosting domestic capital accumulation.     

EMPIRICS OF CHINA'S OUTWARD DIRECT INVESTMENT

Abstract.  We investigate the empirical determinants of China's outward direct investment (ODI). It is found that China's investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that: (i) both market-seeking and resource-seeking motives drive China's ODI; (ii) Chinese exports to developing countries induce China's ODI; (iii) China's international reserves promote its ODI; and (iv) Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.     

Plastic Money Diffusion and Usage: An Empirical Analysis on Italian Households

This paper tries to contribute to the empirical literature on the European consumers’ plastic money payment habits, using the Bank of Italy data over the 1993–2008 period. In line with other evidence on this topic, mainly focused on the US economy, we find that age, education, non‐durable consumptions, regional variation and income are strong predictors of plastic money possession and use in Italy. We also find that households with a higher indebtedness level have a higher propensity to hold credit cards. Furthermore, we find that technological improvements, observed in the last 15 years, do not significantly affect the marginal probabilities to hold and use plastic money conditioned to the main socio‐demographic factors.     

Household debt,macroprudential rules,and monetary policy

Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. In this paper, we ask whether monetary policy should lean against the household indebtedness or macroprudential policies are better suited for the task. To provide a quantitative answer, we develop a small open economy dynamic stochastic general equilibrium model featuring a micro-founded banking sector. We estimate the model using Canadian data and conduct policy experiments. Our findings favor macroprudential approach to reining in indebtedness: using monetary policy that reacts to household debt increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.     

Non‐residents’ Holdings,Market Volatility and Public Debt Sustainability. An Analysis with Data for Italy

Non‐residents’ holdings (NRH) of debt securities have been large in euro area countries, but during the euro area debt crisis some of those countries experienced a steep contraction of such holdings. The analysis aims to provide a data‐founded explanation of what is behind the decrease observed in 2011 by testing two alternative hypotheses. At the same time, we discuss how that decrease might have endangered the sustainability of public debt and study the empirical relevance of the most important of those processes. The topics presented refer to any advanced economy, but we check the hypotheses discussed by taking Italy as a case study because of data constraints. Italy is an interesting country to consider since it is a very large debt issuer. Our results point towards the importance of market volatility to explain variations of NRH, but those holdings do not seem to influence debt sustainability.     

Transmission of monetary policy in times of high household debt

This paper explores whether the degree of household indebtedness can affect the effectiveness of monetary policy. We take an interacted panel VAR approach, using a panel of 23 countries, thereby obtaining several interesting findings, such as the responses of consumption and investment to monetary shocks are stronger in high levels of household debt. Furthermore, such responses become larger in a contractionary monetary policy stance rather than in an expansionary one, which suggests that monetary policy shocks have asymmetric effects. We have also found that monetary policy has a relatively larger impact in countries with higher share of adjustable-rate loans. Finally, we have found that when a country is in a high-debt state and in a contractionary policy stance, monetary policy is more powerful in countries with a higher share of adjustable-rate loans. We conjecture that these findings support the presence of a cash-flow channel with respect to the transmission of monetary policy in a high household debt state.     

How to assess debt sustainability? Some theory and empirical evidence for selected euro area countries

In this article we elaborate on the test proposed by Bohn (1998) that suggests to study whether the primary surplus relative to Gross Domestic Product (GDP) is a positive function of the public debt to GDP ratio in order to detect whether debt policies are sustainable. We argue that this should be complemented by additional tests for countries with rising debt to GDP ratios. We, then, apply that test to some countries of the euro area. In addition, we perform stationarity tests with respect to the real deficit inclusive of interest payments in order to gain additional insight. We conclude that there is empirical evidence that the chosen paths of fiscal policies are sustainable for the countries we consider, although there are country specific differences in debt policies.     

Industrialization and Developing Countries' Indebtedness: A Theoretical and Empirical analysis

The following paper is a theoretical and empirical study of the determinants of international indebtedness of developing countries. I will argue that indebtedness is a divelopment determined phenomenon and an intrinsic tendency of capitalist development during the stage of the internationalization of productive capital. Different levels of indebtedness by developing countries can be explained by their stage of development and their position in the international division of labor. Developing country indebtedness universally increases during the phase of import substutution industrialization (corresponding to the early phase in the internationalization of production). Indebtedness continues to grow in countries exteriencing export-led industrialization, while the rate of grewth declines in countries at a higher stage of this phase.     

Political aspects of household finance: debt,wage bargaining,and macroeconomic (in)stability

The recent literature has shown that income inequality is one of the main causes of borrowing and debt accumulation by working households. This article explores the possibility that household indebtedness is an important cause of rising income inequality. If workers experience rising debt burdens, their cost of job loss may rise if they need labor-market income to continue borrowing and servicing existing debt. This, in turn, will reduce their bargaining power and increase income inequality, inducing workers to borrow more to maintain consumption standards, and so creating a vicious circle of rising inequality, job insecurity, and indebtedness. We believe that these dynamics may have contributed to observed simultaneous increases in income inequality and household debt prior to the recent financial crisis. To explore the two-way interaction between inequality and debt, we develop an employment rent framework that explicitly considers the impact of workers’ indebtedness on their perceived cost of job loss. This is embedded in a neo-Kaleckian macro model in which inequality spurs debt accumulation that contributes to household consumption spending and hence demand formation. Our analysis suggests that (a) workers’ borrowing behavior plays a crucial role in understanding the character of demand and growth regimes; (b) debt and workers’ borrowing behavior play an important role in the labor market by influencing workers’ bargaining power; and (c) through such channels, workers’ borrowing behavior can be a decisive factor in the determination of macroeconomic (in)stability.     

External debt and real exchange rates’ adjustment in the euro area: new evidence from a nonlinear NATREX model

In this article, we revisit medium- to long-run real exchange rate determination within the euro area, focusing on the role of external debt. Accordingly, we rely on the NATural Real EXchange rate (NATREX) approach which provides an explicit framework of the external debt–real exchange rates nexus. In particular, given the indebtedness levels reached by the euro area economies, we investigate potential nonlinearity in real exchange rates dynamics, according to the level of the external debt. Our results evidence that during the monetary union, gross and net external debt positions of the euro area countries have exerted pressures on real exchange rate dynamics within the area. Moreover, we find that, beyond a threshold reached by the external debt, euro area countries are found to be in a vulnerable position, leading to an unavoidable adjustment process. Nevertheless, the adjustment process, while effective, is found to be low and occurs slowly.     

Consumption opportunities and the real value of the external debt

Developing countries have, in the period since the oil shock of 1973–1974, built up large external indebtedness. At the same time world inflation has in good part eroded the real value of existing debts. But the measurement of the inflation effects on real debt depend critically on which among a number of deflators is selected. The deflators proposed in this context have traditionally been export prices, import prices or prices in world trade. This paper argues that the correct deflator is the domestic consumer price index. Using the consumer price index as a debt deflator it is readily shown that conventional results in trade theory are recovered in the presence of external indebtedness: The income effect of an export price increase is proportional to the level of exports, the income effect of an import price increase is proportional to the level of imports. Real income, using a comprehensive income measure, is equal to the value of domestic output less the real value of real interest payments on external debt.