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Public Debt

Selected e-articles

Abstract: This paper introduces a fiscal feedback rule (FFR) in an endogenous growth model with public debt dynamics. We assume that part of the debt burden is covered by tax increases (we name this “sterilization”), while the remaining part is financed by issuing new debt. We show that while low sterilization does not ensure the existence of a long-run steady state, high sterilization can lead to multiple steady states and aggregate instability in the form of local and global indeterminacy, potentially condemning the economy to a low-growth/high-debt trap steady state and long-lasting public debt cycles. By combining econometric estimations and a calibration exercise on developed economies, we highlight that these various perils can occur for empirically plausible values of the sterilization coefficient.

Abstract: This study examines the triangular relationship between public debt, economic growth, and political risks, shedding light on the complex underlying dynamics of these factors. Using a Panel Vector Autoregressive (PVAR) model, we analyze this relationship from multiple angles across 117 countries. The study considers the impact of different political regimes and income levels, recognizing the importance of diverse economic and political contexts in shaping these interactions. The results reveal varied responses to public debt based on the political regime, highlighting that authoritarian systems, imperfect democracies, and full democracies exhibit distinct reactions. Additionally, the study underscores the influence of income levels on the relationship between public debt and economic growth. A balanced and comprehensive approach to public debt management is recommended, with an emphasis on political stability, transparency in political institutions, and economic diversification. Policymakers are advised to consider the duration of shocks to promote sustainable economic growth and fiscal health.

Abstract: In the European Economic and Monetary Union, the fiscal background must ensure the sustainability of the public debt, but fiscal policies must also keep enough flexibility to stabilize global economic activity in case of large shocks, as the common monetary policy becomes less efficient. In the prospect of a reform of the Fiscal Compact after the standby of European fiscal rules with the COVID-19 health crisis, and in conformity with theoretical studies underlying the advantages of such rules, the current paper suggests a rule related to nominal public expenditure excluding interest rates, with a debt feedback mechanism to ensure the sustainability of the public debt path. According to this rule, it appears that six Economic and Monetary Union member countries are particularly highly indebted and should probably control and reduce their public expenditure in order to make their public debt sustainable: France, Spain, Italy, Belgium, Portugal, and Greece.

Abstract: Public debt is a key issue for government institutions, both because of the amount of its revenues, which partly compensate for the possible shortfall in tax collection, and because it is an essential instrument of fiscal policy for the government. This paper reviews the literature on the determinants of public debt in order to identify the explanatory variables of public debt according to the main theoretical and empirical studies. This work will support policy makers who have to obtain financial resources to cover essential and very necessary expenditures nowadays, such as health, education, or infrastructure investment, by controlling debt levels and fiscal pressure. The main policy implication we can derive from these results is that governments should use some of these instruments to reduce general government debt.

Abstract: As our lives were suddenly transformed with the advent of the COVID-19 pandemic, governments had to act quickly to protect their populations, both in terms of health and economy. While we have seen states massively support civil society through social measures, one wonders what legacy this will leave, especially concerning the current dominant ideology of neoliberalism. In this essay, we want to contribute to this reflection by focusing on the phenomenon of public debts, since they are reaching record levels because of the COVID-19 crisis. We argue that massive public debts are, in fact, central and vital to neoliberalism and that state interventions (and central bank use of quantitative easing) that we have witnessed recently are in accordance with usual neoliberal practices and thus do not necessarily constitute a departure from the latter. We propose avenues of research to better understand public debt as a mechanism for redistributing wealth from the bottom to the top, which has thus far been understudied in the critical accounting literature, while opening avenues for political action related to the subject of this essay.

Abstract: Democratic Advantage (DA) arguments explicitly and implicitly assume that democracies have more transparent public debt, enhancing sovereign creditworthiness. This study questions the assumed link between transparent public debt practices and democracy in developing countries. It finds that such practices, which are crucial for investors, (a) do not depend on democratic governance and (b) largely erase the effect that DA variables regime type, rule of law, and property rights have on creditworthiness. In other words, transparent public debt and democracy should not be assumed to go together, and transparent debt practices affect creditworthiness more than DA variables. The findings identify public debt transparency as a statistical and theoretical confounder for current iterations of the DA thesis, which must be addressed to better understand the relationship between democratic governance and sovereign creditworthiness. The policy implication is to not assume that transparent public debt practices are only available to democracies.

Abstract: Differentials between interest rates on government bonds (r) and economic growth rates (g) are a key determinant of public debt dynamics. What are the predictors of r-g, and what risks do policy-makers face? Applying regression methods to data on 22 OECD countries over 1970–2018 shows that higher public debt levels are not predictive of more unfavourable r-g in both Eurozone and stand-alone countries, where the latter issue debt in their own currency. The Euro Crisis – a period characterised by doubts over whether the ECB would backstop government bond markets – is linked with more unfavourable r-g, but only in Euro periphery countries. Our results suggest that the Eurozone’s institutional architecture affects r-g risks. While we find that predicted probabilities of future r – g < 0 are typically significantly higher than 50 % across OECD economies under conditions similar to the pre-Covid-19 years, r-g risks are most significant in the Euro periphery.

Abstract: 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.

Abstract: We compile a unique dataset of medium‐term public debt forecasts for an unbalanced panel of 174 countries, based on International Monetary Fund (IMF) (for the period 1995–2020) and Economist Intelligence Unit (2007–2020) projections. We find that, on average, (i) there is a positive forecast error (FE) in the debt‐to‐gross domestic product (GDP) projections—that is, realized debt ratios are larger than forecasts; (ii) the FE increases with the projection horizon and is statistically significant and large—about 10% of GDP at the 5‐year horizon; (iii) the magnitude is similar between advanced economies (AEs) and emerging markets and developing economies (EMDEs) and in EMDEs is present irrespective of recessions while for AEs is associated with surprise recessions in the forecast horizon; (iv) FEs are not statistically different between IMF program and non‐program cases; and (v) positive FEs are only partly attributable to optimism about growth or the fiscal balance. Looking at the correlates of FEs, we find that FEs are larger during periods of recession, elections, fiscal stress, and high uncertainty and in countries with more economic volatility and public debt.

Abstract: This paper explores the nonlinear dynamics between public debt and economic growth by estimating the threshold level of debt for thirty-nine emerging and developing economies. The study found a considerable variation amongst the debt thresholds in these countries, ranging between 24 and 132 per cent. We observed the evidence for an inverted U-shape relationship either partially or fully only in six countries. On the contrary, our study found that expanding debt even beyond the threshold promotes economic growth in some countries, while debt hinders growth even at low debt levels in a few countries.

Abstract: This paper examines the possible nonlinear relationship between public debt and income inequality. The literature extensively examines the non-linear growth effects of public debt, whereas its inequality effects are not investigated sufficiently. Public debt can be used to finance distributive policies, thereby improving income equality. However, high public debt levels can also harm economic growth and decrease the fiscal space due to sustainability concerns, high risk premia, and large debt service burden. Hence, it is possible that public debt can have non-linear effects on inequality. The empirical analysis documents that the relationship between public debt and inequality is positive with a declining marginal effect in the case of advanced countries. However, developing countries display a U-shape relationship, implying that public debt is initially associated with declines in inequality, while higher levels of debt are associated with higher levels of inequality. The analysis also shows that the determinants of inequality can differ greatly between advanced and developing countries.

Abstract: Ever since the Great Recession, public debt has become politicised. Some research suggests that citizens are fiscally conservative, while other research shows that they punish governments for implementing fiscal consolidation. This begs the question of whether and how much citizens care about debt. We argue that debt is not a priority for citizens because reducing it involves spending and tax trade-offs. Using a split-sample experiment and a conjoint experiment in four European countries, we show that fiscal consolidation at the cost of spending cuts or taxes hikes is less popular than commonly assumed. Revenue-based consolidation is especially unpopular, but expenditure-based consolidation is also contested. Moreover, the public has clear fiscal policy priorities: People do not favour lower debt and taxes, but they support higher progressive taxes to pay for more government spending. The article furthers our understanding of public opinion on fiscal policies and the likely political consequences of austerity.

Abstract: Earlier generations can jeopardise the opportunities, resources and well-being of their successors. Indeed, there is a growing unease with earlier generations leaving large-scale public debts to be paid by younger generations, and many worry that our policies and institutions are being shaped to advantage the interests of older generations at the expense of the young. While much theoretical (and empirical) literature now exists on the many ways in which earlier generations can unjustly jeopardise the well-being of their successors, very little has appeared on how the former’s decisions can generate specifically exploitative relationships. This is all the more surprising, in light of the fact that very large theoretical literatures exist on both intergenerational justice and exploitation. The aim of the article is to bring these two literatures into long overdue contact with one another and analyse an under-researched and yet fundamental problem – intergenerational exploitation. The article answers two questions. (1) What exactly is intergenerational exploitation? (2) What makes this type of exploitation wrong?

Abstract: Rising public debt everywhere has raised the question of how to reduce debt again in the future. High public debt also seems to be an impediment for the exit of central banks from ultra‐low interest rates and quantitative easing. Historical precedents and proposals have included austerity, haircuts and the generation of inflation. Each way has advantages and disadvantages, including uncertainty about effects and side effects. We approach the issue from an historical perspective, based on case studies of prominent approaches to debt reduction. We analyse debt reduction through economic austerity in Italy, hyperinflation in Germany after World War I, inflation in Argentina since the 1980s, currency reform in Germany after WW II, and financial repression in the United States and the United Kingdom after WW II. Finally, we discuss Ronald McKinnon's order of economic and financial liberalisation as well as the Chicago Plan combined with the introduction of central bank digital currencies as an option for the future.

Abstract: L’Europe a réalisé des avancées dans le financement de la défense économique commune contre la pandémie, à travers l’accroissement des emprunts de la Commission européenne. En même temps, la zone euro a manqué une occasion de renforcer sa cohésion par l’émission de dette mutuelle. La question de la gestion du coût des mesures de soutien se posera à plus long terme et il faudra assurer la pérennité de la dette publique accrue. Un effort de consolidation budgétaire deviendra nécessaire, car les solutions de type « monnaie hélicoptère » comporteraient des effets secondaires indésirables pour la santé financière, l’indépendance et la crédibilité de la banque centrale. L’effort fiscal devrait s’appuyer sur des impôts sans effets nocifs sur la croissance, ce qui ne serait pas le cas d’une réintroduction de l’impôt sur la fortune. La taxe carbone pourrait revêtir un rôle important pour favoriser aussi une reprise qui atténuerait à plus long terme les risques climatiques. Toutefois, si l’hypothèse de « stagnation séculaire » est vérifiée, la politique budgétaire ne serait pas confrontée à une contrainte de solvabilité trop forte en vertu des faibles niveaux des taux d’intérêt réels.

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