Saving,investment, fiscal deficits,and the external indebtedness of developing countries

This paper investigates selected aspects of the external indebtedness of the developing countries. It examines both the theoretical and empirical sides of the debt servicing capacity issue, focussing on the role of domestic savings and investment as well as the budget deficits of the public sector in the recent widening of their current account deficits. The results of the study do not support the proposition that increases in external indebtedness among developing countries reflect overconsumption. Capital inflows did not partly or wholly displace domestic saving for the sample of countries examined; rather, the increase in external deficits can in most cases be accounted for by expansion in investment (relative to total output). However, the author qualifies his basically optimistic conclusions in pointing out that countries' ability to repay debt depends not only on whether initial borrowing sustained consumption or investment. but also, if the latter, on the quality of the investment spending.     

Fiscal capacity and commercial bank lending under COVID-19

We investigate the implications of government indebtedness for the efficacy of expansionary government spending in encouraging commercial bank lending growth during the COVID-19 pandemic. Our sample is a large cross-section of over 3000 banks from 71 countries. To address the likely endogeneity of government assistance, we instrument for extra-normal spending using disparities in pre-existing national political characteristics. Our results indicate that bank lending did respond to fiscal capacity, as higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity was higher among weaker banks, suggesting sensitivity to the perceived implications of spending for government assistance going forward. We also found greater sensitivity in high-income economies and for small and medium-sized banks. Our results are robust to a variety of robustness tests, including perturbations in specification, sample, and estimation methodology.     

Does rising consumer debt signal future recessions?: Testing the causal relationship between consumer debt and the economy

This paper examines the relationship between measures of the consumer debt burden and various economic indicators. The consumer loan delinquency rate is useful in predicting consumer spending on durable goods and retail sales, while various economic indicators are useful in predicting the ratio of consumer installment credit to disposable income. The results provide no evidence for the hypothesis that a rising consumer debt burden signals any slowdown in the growth of consumer spending and the economy. Instead, the results indicate that rising consumer indebtedness is a normal occurrence in an economic expansion. It remains to be seen whether innovations in credit card usage, along with the growing use of substitutes for traditional consumer loans, will have an impact on the causal relationship between consumer debt and the economy.     

Debt Relief and Credit to the Private Sector in African Countries

Abstract: The purpose of the paper is to empirically investigate the link between debt relief and credit to the private sector in African countries using a panel method over the period 1988–2004. The motivation for investigating the relationship between debt relief and credit to the private sector follows Christensen's (2004) hypothesis that domestic debt has a negative impact on the credit to private sector; therefore debt relief is expected to alleviate domestic debt and thereby create space for domestic credit, which if it is mostly constituted of public sector credit, crowds out credit to the private sector. The main results of the paper are as follows: (1) debt relief has a significant and positive effect on credit to the private sector in the short term; (2) in the long term, debt relief has positive effects on domestic credit to the private sector only when associated with good initial institutional quality.     

Public Debt,Economic Growth and Inflation in African Economies

We analyse the relationship between public debt, economic growth and inflation in a group of 52 African economies between 1950 and 2012. The results indicate that the limits of public debt are negatively related to economic growth and exhibit, from a given level of debt, an inverted U behaviour regarding the relationship between economic growth and public debt. Briefly, the high levels of public debt are coincident with reduced rates of economic growth and rising levels of inflation. Our results for three specific geographical areas resemble those of the overall analysis, despite some differences. In North African countries, the growth rates of the gross domestic product (GDP) and inflation also show an inverted U behaviour as the ratio of public debt/GDP increases. The highest rate of economic growth is recorded when the ratio of public debt/GDP is below 30% of GDP and corresponds to an average inflation rate of 5.33%. An identical behaviour of the GDP growth rates and inflation also appears in Sub‐Saharan countries until the third interval (60–90%). However, the highest growth rate of the GDP and GDP per capita is registered when the public debt/GDP ratio is in the second interval (30–60%). For the countries of the Southern Africa Development Community, the highest average rate of economic growth (6.8%) is similar to North African countries, when the ratio public debt/GDP is below 30% of GDP, with an average inflation rate of 11%. A number of robustness analyses were performed and the great majority of them confirm the general analysis.     

Public debt and economic growth – economic systems matter

Most studies on the relationship between public debt and economic growth implicitly assume homogeneous debt effects across their samples. We –in accordance with recent literature– challenge this view and state that there likely is a great deal of cross-country heterogeneity in that relationship. However, other than scholars assuming that all countries are different, we expect that clusters of countries differ. We identify three country clusters with distinct economic systems: Liberal (Anglo Saxon), Continental (Core EU members) and Nordic (Scandinavian). We argue that different degrees of fiscal uncertainty at comparable levels of public debt between those economic systems constitute a major source of heterogeneity in the debt-growth relationship. Our empirical evidence supports this assumption. Continental countries face more growth reducing public debt effects than especially Liberal countries. There, public debt apparently exerts neutral or even positive growth effects, while for Nordic countries a non-linear relationship is discovered, with negative debt effects kicking in at public debt values of around 60% of GDP.     

欧元区国家主权债务危机、欧元及欧盟经济

论文认为欧元区主权债务危机的基本性质属于南欧国家寅吃卯粮所导致的财政危机,但是由于欧元区在制度设置和运行机制上存在缺陷,使债务危机演变成欧元的信任危机。欧元区成员国和欧盟业已认识到欧洲货币联盟的不足,通过加强财政政策一体化来克服欧元区的内在矛盾似乎不可避免。欧元不会因为主权债务危机的冲击而垮台,但是欧洲经济将受到债务危机的拖累,增长前景不容乐观。     

Exploiting the Chaos: Terrorist Target Choice Following Natural Disasters

This article explores the differences between transnational and domestic terrorism, further differentiating by private versus government targets, to estimate the effect of exogenous catastrophic shocks on a country's level of domestic and transnational terrorism. The empirical analysis uses detailed data on terrorism, natural disasters, and other relevant controls for 176 countries from 1970–2007 to illuminate several key disparities in a postdisaster target choice of terrorists. The results indicate that natural disasters incite both transnational and domestic terrorism; however, evidence is found for dissimilar motivations between the two. While both types of terrorism increase after disasters, transnational attacks against the government increase immediately following the disaster, suggesting an impetus to exploit weakened “hard” targets during the chaos. Conversely, domestic terrorism against the government takes longer to manifest, suggesting a period of time for which the public recovers and assesses the government's response.     

Pollution in a globalized world: Are debt transfers among countries a solution?

We analyze the effects of a debt relief, that is, a decrease in public debt of a low-income country financed by a high-income country, on environmental quality. Under perfect mobility of assets, the debt relief increases the overall capital stock, and environmental quality when public abatements are sufficiently efficient. Welfare in both countries can also improve. Under a weak mobility of assets, capital does no more increase in the richest country, but environmental quality can improve. This comes from a crowding-out effect of debt in the high-income country, which does no more take place when the mobility of assets is significant.     

Export Currency Pricing and Fiscal Multipliers

This paper develops a small open economy dynamic stochastic general equilibrium model to study the implications of the use of foreign currency in export pricing for fiscal policy in East Asian economies. The result shows that external currency pricing amplifies the effect of an exogenous government spending shock on output. The impact and cumulative multipliers are larger under external currency pricing. However, the result depends on the government policy regime. When the government allows for a systematic response of government spending to public debt, the multipliers in the medium-term are smaller under external currency pricing.     

Does Country Risk Promote the Informal Economy? A Cross-National Panel Data Estimation

This article investigates whether country risk plays an important role in determining the size of the informal economy. Using annualized panel data for a sample of 131 countries and regions covering 1999–2007, and controlling for a set of control variables, we find that country risk is a robust and significant determinant of the informal economy: a 1% increase in the country risk rating (decrease in the country risk) causes a 0.1% fall in the informal economy, and political risk has the largest effect, followed by economic risk. Moreover, the estimation results provide little evidence in support of an inverted-U relationship between urbanization and the share of the informal sector, which shed new light on the urbanization-the informal economy nexus.     

Do remittances moderate financial development–informality nexus in North Africa?

The prevalent informality and sheer size of international remittances characterize the North African countries. This study primarily aims at investigating how remittances moderate the effects of financial development on the informal economy in North African countries. Employing pool mean group (PMG)/panel ARDL approach and a balanced panel data set over the period 1980–2015, we find that remittances moderate the negative relationship between financial development and informal economy. This finding suggests that remittances bolster financial development, which, in turn, decreases the informal economy. Based on this result, we recommend that tailored policies and interventions are needed to promote financial development and international remittances in the North African region.     

Capital Flow Management Policies and Riskiness of External Liability Structures: the Role of Local Financial Markets

This paper investigates the role domestic financial systems play in the effectiveness of capital flow management policies (CFMs) on the risk of over-reliance on debt. Using data from 44 emerging market countries over the period 1995—2008, we investigate the relationship between financial development, CFMs, and the share of debt in external liabilities as the measure of financial stability risks. We find that financial sector development is an important channel for the effectiveness of CFMs, and enhances the impact of different policy measures on the reduction of external debt liabilities. Our results show that CFMs are significantly more effective in curbing debt inflows in a bank-based economy but, to a lesser extent, in a market-based economy. Our findings remain robust to alternative measures of external liability structures, CFMs and financial development, and consideration of potential endogeneity.     

Impact of Terrorism on Cross-Border Mergers and Acquisitions (M&As): Prevalence,Frequency and Intensity

This paper contributes to the literature on the impact of terrorism on international business by focusing on the specific case of cross-border mergers and acquisitions (M&As) using bilateral data for 59 countries over the period 2000–2011. We are interested in the following set of questions: (a) the impact of source and host country terrorism on bilateral M&A flows using various measures of terrorism (i.e. prevalence, frequency and intensity); (b) whether terrorism affects developing countries differently; (c) whether good institutions in developing host countries can offset the negative effects of terrorism; and (d) whether terrorism incidents in a particular economy has negative spillovers to its neighbors. To preview the main conclusions, we find that an augmented gravity model fits the data well. While the occurrence of terrorism in either the host or source does not appear to have any impact on bilateral M&A, the frequency and intensity of terrorist attacks significantly deter M&A flows, especially in the latter. We also find that good institutions negate the impact of terrorist attacks in the developing host country. There is also some evidence that regional spillovers reduce M&As in the host country.     

Liquidity Risk and Banks' Asset Composition: Implications for Monetary Policy

Monetary growth models in which the government is a net debtor demonstrate that inflation adversely affects capital formation through the crowding out effect. Interestingly, the results are at odds with empirical evidence. In particular, recent studies point to an asymmetric relationship between inflation and the real economy across countries. Specifically, inflation and output are negatively correlated in poor countries. In contrast, inflation is associated with higher levels of economic activity in advanced economies. I present a monetary growth model with public debt, where the exposure to risk is inversely related to the level of income. In this setting, I demonstrate that the effects of monetary policy depend on the level of capital of the economy. In poor countries, banks' portfolios consist primarily of government liabilities. Therefore, a higher rate of money creation inhibits capital formation in these economies. In contrast, banks devote more resources toward productive uses in advanced countries. Consequently, monetary policy generates a Tobin effect.     

The External Debt‐Servicing Constraint and Public‐Expenditure Composition in Sub‐Saharan Africa

Abstract: In the light of the current global financial and economic crises, how would governments in sub‐Saharan Africa (SSA) allocate their budgets across sectors in response to a binding debt‐servicing constraint? Within a framework of public‐expenditure choice, the present paper estimates constraint‐consistent debt‐service ratios and employs them in a Seemingly Unrelated Regression involving a five‐year panel for up to 35 African countries over 1975–94, a period preceding the Highly Indebted Poor Countries (HIPC) initiatives. While observed debt service is found to be a poor predictor of expenditure allocation, constraining debt servicing shifts spending away from the social sector, with similar impacts on education and health. The implied partial elasticity of the sector's expenditure share with respect to debt is estimated at 1.5, the highest responsiveness by far among all the explanatory variables considered, including external aid. Thus, if the social sector is to be protected, sufficient debt relief for SSA countries should be pursued.     

Effects of Government Spending on the Current Account with Endogenous Time Preference

This paper extends a previous model to set up a small open economy with perfect capital mobility, and examines the effects of an unanticipated permanent rise in public spending on the optimal rates of private consumption and the current account. The novelty of the paper is consideration of the relationship between private and public consumption in the household's utility function as well as endogenous rates of time preference. It is found that the key factor determining the adjustment patterns of private consumption and the current account is the marginal utility of private consumption and of public spending, which results from endogenous recursive preferences.     

The canadian fiscal problem: The macroeconomic connection

Canada's public sector debt has increased from 5 percent of GDP in 1974 to 64 percent in 1994 on national accounts. The paper provides a summary assessment of the relative contributions of changes in taxation, program spending, interest rates, and economic growth and fluctuations to this explosion of public debt. By far the most important source of debt accumulation has been the anti-inflationary recessions of 1982 and 1990. Higher world interest rates and slower trend productivity growth have been significant, but secondary contributing factors. Lax spending has definitely not been a net source of debt over the period.     

固定汇率制度下的财政政策:开放经济宏观经济学的拓展

本文主要建立在新开放主义宏观经济学理论上,进一步拓展和分析不同财政政策在固定汇率制度下对国民经济的影响,如消费、产出与汇率等。通过引入迭代模型的基本框架从而打破传统的李嘉图等价假设,我们发现因为有限生命代理人把所购买的国债看作是一种净财富,所以通过发行债券融资而导致的政府支出暂时的增加毫无疑问地将会增加本国居民相对于国外居民的消费水平。而另一方面,由于汇率水平固定不变和短期的价格粘性,政府支出增加的部分将平均分配给本国和外国商品。因此,政府支出暂时的增加将会减少本国的净国外资产头寸。而对于货币政策来说,本国居民相对消费水平的增加将导致本国货币升值压力,本国中央银行为了维系固定汇率水平不得不被动地增加货币供给。     

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.