Regional debt in monetary unions: Is it inflationary?

This paper studies the inflationary implications of interest bearing regional debt in a monetary union. Is this debt simply backed by future taxation with no inflationary consequences? Or will the circulation of region debt induce monetization by a central bank?We argue here that both outcomes can arise in equilibrium. In the model economy, there are multiple equilibria which reflect the perceptions of agents regarding the manner in which the debt obligations will be met. In one equilibrium, termed Ricardian, the future obligations are met with taxation by a regional government while in the other, termed Monetization, the central bank is induced to print money to finance the region's obligations. The multiplicity of equilibria reflects a commitment problem of the central bank. A key indicator of the selected equilibrium is the distribution of regional debt holdings. We show that regional governments, anticipating central bank financing of their debt obligations, have an incentive to create excessively large deficits. We use the model to assess the impact of some policy measures within a monetary union as well as dollarization.     

Growth patterns of the European venture capital industry

Although the European venture capital industry has become nearly as important as its American counterpart, little research has been done to describe its nature and importance. This study gives in the first place an overview of the importance of the venture capital industry in the major European countries. Thereafter, we look for funding and investment patterns in the different European countries. We hypothesize that there is a difference between countries in which the venture capital industry is just emerging, and those where the venture capital industry is since long established.The data are mainly, but not solely, taken from the yearly statistics of the European Venture Capital Association (EVCA) and cover the period 1984–1989. The characteristics we look at are: (1) the sources of the funds flowing into the industry, broken down with respect to investor type and geographical location of the investor; and (2) the investments, broken down with respect to investment stage (using the EVCA definitions of the different stages), geographical location, degree of syndication, and industrial sector of the investee companies. In Europe as a whole, the most important group of investors are the banks (28%), the pension funds (17%), and the insurance companies (12%). Banks dominate the Swiss industry (48%); corporate investors dominate the German, Swedish, and Portuguese industries, whereas these are nearly completely absent in Denmark (2%), Ireland (4%), and the United Kingdom (5%). Eighty percent of all venture capital funds are raised domestically, 7% in another European country, and the remaining 13% in a non-European country.Almost half of the European investments (44%) are made in the expansion stage; management buy-outs (MBOs) account for another 36%. Only 14% is invested in seed or start-up companies, much less than the 30% in the U.S. Half of the venture capital investments in the United Kingdom are buy-outs. The highest start-up investment activity takes place in Austria and Spain. On average, more than half (54%) of the invested amount in Europe is syndicated, but only 6% internationally, while 10% is invested internationally.We also search for similarities and dissimilarities in the characteristics of the sources of funds and of the investments. The hypothesis is that a growth pattern can be distinguished, determining the maturity of the venture capital industry in a particular country. The characteristics that we think would discriminate most among the different industry stages are the importance of government agencies, pension funds, and insurance companies (sources of funds); of start-up, later stages, or MBO investments; and the percentage of international and syndicated investments. Cluster analyses show that there is a growth pattern, but it is less clear than expected. Characteristics of mature industries are a bigger size, relative to the gross national product of the country, the presence of pension funds and insurance companies as investors in the industry, the syndication of the deals, and the absence of the government as an investor, in the 1980s, investments in management buy-outs are mainly done by the mature industries. No pattern can be distinguished for the investments in early or later stages.The major implication from this study is the fact that the European venture capital industry cannot be approached as a single, undifferentiated industry. Each country has its own structures, institutions, and policies, which make the venture capital industries in the different countries have unique characteristics. Moreover, the European venture capital industry has different characteristics than the American industry; this has to be taken into account when comparing both industries.