Public debt management and private financial development

In several developing countries, high and rising public debt is an important source of vulnerability. Strengthening debt management is a priority, but its effects on domestic economies have been hardly analyzed. This paper asks whether better public debt management could have spillover effects on the private sector, leading to more (and more stable) private capital flows and domestic credit. This is a relevant question in a context of financial deepening and increasing private capital inflows, which could be prone to episodes of bonanza, sudden stops and crises. Our results, based on a sample of developing countries, show positive spillover effects from better public debt management to private capital inflows and domestic financial deepening.     

Public and Private Investment and The Growth Process in Developing Countries

This paper examines the relative contribution of public and private investment to per capita GDP growth in developing countries. It extends the basic neoclassical model of growth by separating investment into its public and private components, and estimates this model for a sample of 95 developing countries over the period 1970–90 using both cross-sectional and panel data. Using data on relative supplies of public and private capital stock, rates of return to public and private investment are also computed. The results suggest that once other determinants of growth, such as human capital formation, population growth, and technical progress, are taken into account, public and private investment have different effects on growth, and that these effects are characterized by marked regional and inter-temporal variations.     

Public versus private provision of liquidity: Is there a trade-off?

To what extent is public debt private liquidity? Much policy advice given in the aftermath of the financial crisis rests on the assumption that increasing public debt relaxes borrowing constraints of private households. This is the case for ad-hoc debt limits, which are exogenous to public policy. Instead, if debt limits are fully endogenous, as e.g. in the case of the natural borrowing limit, public debt has no impact. We assume that borrowing limits arise because of limited contract enforceability and are therefore determined as equilibrium outcomes. Using an incomplete markets economy in which households are subject to uninsurable earnings shocks, we show that public debt provides some liquidity, but less so than it would if constraints were imposed ad-hoc. We show that generating borrowing constraints as an equilibrium outcome substantially alters the answers to other important questions, such as for the welfare effects of government debt or its impact on real economic activity.     

An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis

We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries. Besides, without exception, the marginal effects of sovereign spread drivers (specifically, the variables that measure global market sentiment) increased during the crisis compared to the pre-crisis period, especially in peripheral countries. Moreover, the increase in the significance of the banking level of indebtedness and foreign bank's claims in the public sector (mainly in peripheral countries) along with the crisis unfolding seems to highlight the interconnection between private and public debt and thus, between banking and sovereign crises.     

An integrative analysis of external debt,capital accumulation and production in Latin America,Asia-Pacific and Sub-Saharan Africa

This paper estimates the nexus of inter-relationships between public and private external debts accumulation, capital accumulation and production with panel data for the period 1970–1988 from highly indebted developing countries clustered into three distinct regions: Latin-America, Asia-Pacific and Sub-Saharan Africa. The simultaneous equations' estimation results indicate that the full effects of the public and private external debts on GNP are small and of an opposite sign, whereas an increase in the GNP level raises substantially the public and private external debts. These findings support Bulow-Rogoff's (1990) proposition that the external debts of developing countries are not a primary cause of economic slowdown.     

政府债务对经济增长的影响及作用渠道

基于1960～2010年113个国家的面板数据集,运用系统广义矩动态面板方法和稳健性分析,比较发达国家和发展中国家政府债务经济增长效应的差异,并尝试分析政府债务影响经济增长的渠道。研究结果显示,政府债务对经济增长有非线性影响;发达国家政府债务对经济增长、投资以及全要素生产率均无显著影响;发展中国家对政府债务的直接承受力更弱,但在一个宽松的临界点内,政府债务的增加可以提高投资率。     

Currency Mismatching

This paper considers a firm domiciled in an emerging market, modeling its decision to denominate its debt in a combination of its domestic currency and a foreign currency, that is, the dollar. The objective is to determine those situations when the firm is motivated to engage in currency mismatching, that is, denominating a higher percentage of its debt in dollars than what is warranted by its dollar‐denominated sales. The following factors are shown to induce greater currency mismatching: speculative capital flows into the emerging market, reduced ability to price discriminate between domestic and foreign customers, increased exchange rate stability, and lower risk‐aversion. Copyright © 2011 John Wiley & Sons, Ltd.     

Financing constraints and the use of performance-sensitive debt

Performance-sensitive debt (PSD) is a popular financial instrument in the corporate private debt market. In a real-options setting, this paper aims to clarify how PSD impacts on investment policy, capital structure, and agency cost of financing constraints when the firm faces the upper limit of debt issuance. We show that the constrained leverage hardly depends on the performance sensitivity. In particular, our conclusions predict that PSD can decrease the severity of financing constraints relative to the fixed-coupon debt case and the loss of firm value arising from investment and financing distortions due to the presence of financing constraints. The higher the performance sensitivity, the less likely that the firm is financially constrained. These findings provide a novel investment-based explanation for issuance of PSD.     

Sovereign debt composition and time-varying public finance sustainability

We compute time-varying responses of the sovereign debt ratio to primary budget balances for 13 advanced economies between 1980 and 2012, and assess how fiscal sustainability reacts to different characteristics of government debt. We find that the sustainability time-varying coefficient increases and countries become more fiscally sustainable if they contract a higher share of long-term public debt, if more debt is held by the central bank or if it is easily marketable in capital markets.     

Sovereign default risk,debt uncertainty and fiscal credibility: The case of Brazil

Since Credit Default Swaps spreads reflect the sovereign risk and, thus, the uncertainties related to government solvency, the goal of this study is to examine the relation between sovereign risk and debt uncertainty (measured by the disagreement in expectations about public debt) in an important developing country – Brazil. Furthermore, the paper analyzes whether fiscal credibility plays a key role in mitigating the effect of debt uncertainty on sovereign risk. The results suggest the disagreement in expectations about public debt affects the sovereign risk, and fiscal credibility plays a twofold role, it reduces sovereign risk, and it mitigates the effect of debt uncertainty on sovereign risk. Besides, quantile regression estimates reveal that fiscal credibility improvements are even more important when sovereign risk levels are higher.     

A model of currency crises with heterogeneous market beliefs

This paper shows that the approach followed by Tamborini (2015) in analyzing and interpreting the euro area public debt crisis, based on the role played by agents characterized by heterogeneous market beliefs, can be applied also to the case of currency crises. By doing so, rather than considering the private sector as an atomistic player endowed with perfect information, and by considering a central bank that optimizes the amount of unsterilized inflow of foreign reserves in a Mundell-Fleming type speculative attack model, allows to explain the interest rates convex non-linearity that characterized, for example, a country like Italy during the 1992–93 EMS crisis.     

Fiscal consolidation and its cross-country effects

We build a new Keynesian DSGE model consisting of two heterogeneous countries in a monetary union. We study how public debt consolidation in a country with high debt (like Italy) affects welfare in a country with solid public finances (like Germany). Our results show that debt consolidation in the high-debt country benefits the country with solid public finances over all time horizons, while, in Italy, debt consolidation is productive in the medium and long term. All this is with optimized feedback policy rules. On the other hand, fiscal consolidation hurts both countries and all the time, if it is implemented in an ad hoc way, like an increase in taxes. The least distorting fiscal mix from the point of view of both countries is the one which, during the early phase of pain, Italy cuts public consumption spending to address its debt problem and, at the same time, reduces income tax rates, while, once its debt has been reduced in the later phase, it uses the fiscal space to further cut income taxes.     

Structural vulnerability and resilience to currency crisis: Foreign currency debt versus export

Is there any factor that is not analyzed in the literature but is important for preventing currency crises? I argue that exports are an important factor to prevent currency crises that has not been frequently analyzed in the existing theoretical literature. Using the third generation model of currency crises, I derive a simple and intuitive formula that captures an economy’s structural vulnerability characterized by the elasticity of exports and repayments for foreign currency denominated debt. I graphically show that the possibility of currency crisis equilibrium depends on this structural vulnerability and also analyze how this vulnerability impacts the effectiveness of monetary policy response.     

CENTRAL BANKS: FROM POLITICALLY INDEPENDENT TO MARKET-DEPENDENT INSTITUTIONS

Responses to the financial crisis are undermining the Chinese walls painfully built between monetary and fiscal authorities. Central banks and state treasuries are working side by side as lenders of last resort. Central banks are helping economic ministers with purchases of public debt and discounting of private paper. Regulation and control of financial institutions is now a political football. Central banks must be seen again as market-dependent institutions in a world of currency competition. Privatisation in law or in fact is back on the table.     

Formulation of public debt management strategies: An empirical study of possible drivers

A well-designed public debt management strategy can help countries reduce their borrowing cost, contain financial risks and develop their domestic markets. Using survey data on debt management strategies, this paper studies whether the probability that a country has a formal debt management strategy, publishes the strategy document, and uses quantitative benchmarks to formulate its debt management strategy is affected by democratic accountability, institutional quality, past debt crises/defaults, official development assistance, and participation in debt management programs. We find that countries located in Latin America and the Caribbean are less likely to have developed a debt management strategy and, if they have, are less likely to publish it. In contrast, countries located in the Middle East and North Africa are less likely to use quantitative benchmarks in the formulation of their debt management strategies. A country is more likely to have developed a debt management strategy if it has the experience of a past debt crisis, but not of repeated debt crises. Institutional quality and democratic accountability could significantly contribute to the emergence of more transparent and accountable debt management strategies in developing countries. IFIs’ technical assistance on public debt management could be enhanced by IFIs conducting their own, prior diagnostic reviews.     

Economic policy uncertainty and cost of debt financing: International evidence

Prior research shows that economic policy uncertainty affects a wide range of corporate financial decisions; however, there is little research on the relationship between economic policy uncertainty and cost of debt financing across countries. In this paper, we argue that economic policy uncertainty affects cost of debt financing through two mechanisms including information asymmetry and default risk. With a sample of 163,243 firm-years across 17 countries from 2003 to 2016, we find that economic policy uncertainty positively affects cost of debt financing and this effect is stronger during the global financial crisis from 2008 to 2009. Moreover, our research findings show that large firms’ debt financing cost is less affected by economic policy uncertainty.     

Robust bubbles with mild penalties for default

Limited enforcement of debt contracts and mild penalties for default can lead to low equilibrium interest rates, to ensure debt repayment. Low interest rates, in turn, create conditions for bubbles. I show that bubbles in unsecured private debt exist when the punishment for default is a permanent or a temporary interdiction to trade. Bubbles are an inefficient source of liquidity, as they lower interest rates and reduce welfare by discouraging saving.     

Internalizing intergenerational externalities by regionalization

The emission of long-lived pollutants and public debt policies are related by the joint problem of intergenerational externalities. This paper examines both phenomena from the local perspective, in a model with interregional household mobility. We conclude that local environmental agencies have incentives to internalize all intergenerational pollution externalities, provided all rents of immobile production factors, including waste emissions, are appropriated by the regions. Contrary to widespread belief, however, neutrality of local public debt is not guaranteed in general. Shifts in the intertemporal pattern of local taxes change the net wealth of local property owners if distortionary residence-based taxes are imposed to service the local debt.     

Local Public Debt with Overlapping Generations

Discussions of Ricardian equivalence for local public debt have generally centered on the role of land within a particular generation. This paper examines the full neutrality of local public debt in determining whether local public debt is neutral in the resource allocation between (1) mobile and immobile individuals who belong to the same generation, and between (2) individuals belonging to different generations. We find that local debt neutrality continues to hold across generations under migration.