Household Debt Overhang and Transmission of Monetary Policy

We investigate how the level of household indebtedness affects the monetary transmission mechanism in the U.S. economy. Using state‐dependent local projection methods, we find that the effects of monetary policy are less powerful during periods of high household debt. In particular, the impact of monetary policy shocks is smaller on GDP, consumption, residential investment, house prices, and household debt during a high‐debt state. We then build a partial equilibrium model of borrower households with financial constraints to rationalize these facts. The model points to the weakening of the home equity loan channel as a possible reason for the decline in monetary policy effectiveness when initial debt levels are high.     

The shared environmental responsibility principle: new developments applied to the case of marine ecosystems

Estuaries provide advantageous sites for both harbors and fish habitats. In many countries, harbor expansion in estuaries contributed to the decline of fish populations with impacts at the global scale. Restoring these habitats is important to prevent a global biodiversity crisis but is costly and potentially unaffordable for polluters under the Polluter Pays Principle. Such affordability issues prompt decision-makers to reduce environmental targets of restoration programs. Harbor infrastructures destroy fish habitats but generate benefits for society and contribute to the public interest, raising some questions on who is responsible for environmental degradations and who can afford environmental restoration costs? One way to allocate restoration costs is to analyze the amount of harbor services consumed by economic sectors. This paper addresses these questions by computing burden sharing scenarios with an input–output matrix. These scenarios are simulated under the shared responsibility principle to distribute restoration costs among stakeholders in the Seine estuary, France.     

Political uncertainty,risk of Frexit and European sovereign spreads

Using data from a prediction market (crowd-based forecasts), we build a daily measure capturing the risk of Frexit related to the 2017 French presidential elections. We study how unexpected changes in this new measure of political uncertainty in France affect European sovereign spreads vis-à-vis Germany. We show that our uncertainty proxy drives not only the French sovereign spread but also the spreads of those EU countries deemed the most vulnerable to the risk of desegregation of the Euro Zone. These results suggest that specific political uncertainty affects short-term investor’s expectations and may outweigh other economic determinants of sovereign spreads shortly prior to high stake elections     

REDISTRIBUTIVE POLITICS AND GOVERNMENT DEBT IN A BORROWING‐CONSTRAINED ECONOMY

We develop a two‐period, three‐class of income model where low‐income agents are borrowing constrained because of capital market imperfections, and where redistributive expenditure is financed by tax and government debt. When the degree of capital market imperfection is high, there is an ends‐against‐the‐middle equilibrium where the constrained low‐income and the unconstrained high‐income agents favour low levels of government debt and redistributive expenditure; these agents form a coalition against the middle. In this equilibrium, the levels of government debt and expenditure might be below the efficient levels, and the spread of income distribution results in a lower debt‐to‐GDP ratio.     

RECENT DEVELOPMENTS IN CONSUMER CREDIT AND DEFAULT LITERATURE

This survey discusses recent contributions to the quantitative literature on unsecured consumer debt and default, and some ongoing challenges for the literature. Key topics include the sources of the rise in personal bankruptcies, the importance of asymmetric information and the effects of developments in information technologies on consumer credit markets, delinquency and informal bankruptcy, debt collection and restructuring of distressed debt, the cyclical behavior of consumer debt and default, and the insurance role of household debt. Implications for welfare analysis and policy design are discussed. Several theoretical contributions and approaches to modeling the consumer credit markets are also highlighted.     

Revisiting the finance–growth nexus: the Turkish case, 1980–2010

In Turkey, the empirical results on the link between financial development and economic growth are mixed. The existing studies do not take into account the fact that Turkey has experienced endemic political and economic instabilities over extended periods. This study aims to analyse the role of macroeconomic instability and public borrowing on the finance–growth nexus in Turkey by using time series econometric techniques over the 1980–2010 period. In doing so, we attempt to extend the existing literature by taking into account the role of macroeconomic instability as well as public borrowing. Our results reveal that there are additional – albeit indirect – channels between finance and growth via the effects of macro instability and public borrowing on financial development and economic growth. After taking into account the effects of overall instability and public borrowing, we found that growth–financial development relationship is bidirectional and permanent. In other words, in Turkish case, economic growth and financial development are jointly determined. Thus, our results shed some light on the ambiguity of the evidence on the link between financial development and economic growth for Turkey.     

Debt sustainability in emerging market countries: Some policy guidelines from a fan-chart approach

This paper uses a probabilistic approach to simulate the medium-term public debt trajectories of several major emerging market countries. We extend the standard debt sustainability analysis framework so as to more faithfully reproduce these countries’ economic reality in two aspects. First, we allow them to differ in the cyclical stance of their fiscal policy and in their degree of fiscal responsiveness to debt. Second, we explicitly integrate the specific risk premium paid by each country when borrowing in foreign currency. It allows us to evaluate the impact of alternative policies that the government may consider to improve sustainability. The results lead to three policy recommendations: i) a country should consider decreasing its exposure to currency risk only in extreme cases (like Argentina); ii) on the contrary, greater fiscal responsiveness (i.e. stronger fiscal tightening whenever there is a debt increase) could enhance sustainability to a much greater extent; iii) countries with low responsiveness to debt or a poor fiscal consolidation track record should be cautious with countercyclical fiscal policies, as they may trigger an unsustainable debt trajectory in the trough of the economic cycle.     

Pains and gains of environmental management system certification for the sustainable development of manufacturing companies: Heterogeneous effects of industry peer learning

Environmental sustainability is a growing global concern. Environmental management systems (EMS) could be an effective strategic tool to help firms deal with their sustainable development. However, whether EMS certification pays off financially and how it takes effect can be debated. Thus far, these questions remain largely under‐researched. In particular, the effects of EMS certification on financial performance are inconclusive, and the reasons explaining the effects are underdeveloped. This study aims to enrich the current research by exploring the mediating and moderating roles from the perspective of cost‐efficiency trade‐offs to reveal how EMS certification affects financial performance. Applying a PROCESS procedure analysis and causal mediation analysis to a sample of 1,751 Chinese listed manufacturing firms from 2008 to 2016, this study shows that the effect of EMS certification on firms' financial performance is insignificant because their operating costs burden increases while their marketing efficiency and managerial efficiency improve. For the first time, this study demonstrates the moderating role of industry peer learning, as the mediating effects decrease with the growth of industry peer learning.     

Political economy of taxation,debt ceilings,and growth

This study presents voting on policies, including labor and capital income taxes and public debt, in an overlapping-generations model with physical and human capital accumulation, and analyzes the effects of a debt ceiling on a government's policy formation and its impact on growth and welfare. The results show that the debt ceiling induces the government to shift the tax burdens from the older to younger generations, but stimulates physical capital accumulation and may increase public education expenditure, resulting in a higher growth rate. Alternatively, the debt ceiling is measured from the viewpoint of a benevolent planner and lowering the debt ceiling (i.e., tightening fiscal discipline) makes it possible for the government to approach the planner's allocation in an aging society.     

Debt Covenant Restriction,Financial Misreporting,and Auditor Monitoring*

Theory suggests that financial report-based debt covenants engender incentives for the manager to relax covenant constraints through accounting choices in order to avoid costly covenant violations. Prior studies directly testing this hypothesis in the context of financial misreporting fail to find consistent evidence. Using a more refined measure of debt covenant restriction, we find that debt covenant restriction is positively associated with the probability of financial statement misstatements. This positive association is driven by performance covenants rather than capital covenants and is more consistent with the manager striving to avoid a “false-positive” violation than to delay the violation. Our results also imply that managers resort to both income-increasing and non–income-increasing misreporting to relieve covenant constraints and rely more on the latter when faced with greater earnings management constraints. Additionally, the auditor charges higher audit fees to firms with more binding covenants even outside the violation state, and audit fees increase with constraints relative to both performance and capital covenants, reflecting greater financial reporting risk and bankruptcy risk, respectively. Within capital covenants, we find some evidence of even higher audit fees for tighter intangible-inclusive versus intangible-exclusive capital covenants. Lastly, our evidence suggests that the positive association between covenant constraints and misreporting is attenuated when the auditor has more experience with debt covenants, has greater bargaining power over the client, or faces greater litigation risk.