Managing Debt Stability (original) (raw)

Public Debt Management and Macroeconomic Stability: An Overview

The World Bank Research Observer, 2005

Recent research suggests that management of the public sector's debt can have important effects on a country's macroeconomic performance. This article provides an overview of the factors that the recent literature has identified as important in determining the optimal composition of the public debt. Based on this analysis, it attempts to establish general guidelines for public debt management in emerging economies. To retain market access and promote domestic financial market development, governments should generally finance themselves at market rates using a wide variety of securities. Beyond this general principle, the optimal composition of the public debt involves a tradeoff between enhancing the government's anti-inflationary credibility and reducing the vulnerability of its budget to macroeconomic shocks. Consequently, the optimal composition of the debt depends on a country's circumstances. Debt should be heavily weighted toward long-term nominal securities for governments that have anti-inflationary credibility and toward long-term indexed debt for those that do not.

Dynamic Stability of Public Debt: Evidence from the Eurozone Countries

This paper investigates the dynamic stability of public debt and its solvency condition on the face of crises periods (1980-2021) in a sample of 11-euro area countries. The focus is on the feedback loop between dynamic stability of public debt and interest rates, discounted by the economic growth, in conjunction with budget deficits during tranquil and turbulent periods. Using the GMM panel dynamic model, the results show that dynamic stability was the case before the global financial crisis (GFC), while from GFC to pandemic, dynamic instability prevailed on the evolution of public debt. Moreover, dynamic instability exerted a highly persistent effect on the evolution of debt. Furthermore, panel threshold estimates show that dynamic instability of debt starts to violate the solvency condition when the borrowing cost is above 3.29%, becomes even stronger when it is above 4.39% and exerts even more pressure when the level of debt is greater than 91%. However, the debt sustainability c...

Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries

The B.E. Journal of Macroeconomics, 2007

Is there any systematic explanation of variations in the cost of debt servicing over time and across countries? This paper examines the influence of fiscal variables on borrowing costs in a panel of OECD countries, showing that these variables have a significant role. In particular, an improvement of the primary fiscal balance and a reduction in the stock of outstanding debt are associated with significant reductions in debt servicing costs, amplifying the effects of primary adjustment on the fiscal position. These effects appear to be non-linear: more pronounced for highly-indebted countries. A significant country-specific component remains, however; several explanations for this component are discussed, including debt management and market infrastructure.

Public debt sustainability: An empirical study on OECD countries

Journal of Macroeconomics, 2018

For a panel of 21 OECD heterogeneous countries from 1991 to 2015, we study governments' reactions to the accumulation of debt and look at whether governments voluntary take corrective measures when the debt-GDP ratio starts rising or they rather let the debt grow. We distinguish between discretionary and automatic response of primary balance of government actions, as captured by the structural component of public primary balance and by cyclical component of public primary balance. We show the existence of a systematic long-term relationship between debt and structural primary balance supporting the view that the long-term governments' discretionary response to increases in the debt-GDP ratio is negative, that is, governments are not currently taking long-term actions that counteract the increases in debts and do not satisfy the intertemporal budget constraint. In the short term, an asymmetric fiscal policy response exploiting the output gap, by part of the political class of the countries considered, seems to emerge: it intervenes with a new deficit and debt when the output gap is positive, but it does not adopt a symmetrical correction when the situation is reversed.

How is the Debt Managed? Learning from Fiscal Stabilizations

Scandinavian Journal of Economics, 2002

This paper examines public debt management during episodes of fiscal stabilization when long-term interest rates are generally higher than governments' expectations of future rates. We find that governments increase the share of fixed-rate long-term debt denominated in the domestic currency, the higher is the conditional volatility of short-term interest rates, the lower are long-term interest rates, and the stronger is the fall in long-term rates that follows the announcement of the stabilization program. This evidence suggests that governments tend to prefer long to short maturity debt because they are concerned about refinancing risk. However, when long-term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs.

Price stability, inflation targeting and public debt policy

2008

This paper studies the implications of inflation targeting (IT) regimes for public debt accumulation. By utilizing a simple dynamic macroeconomic policymaking model, we show that IT regimes may lead to higher public debt. Our results suggest that in countries where there are inherent distortions in the economy all IT regimes can do is shift the burden of adjustment onto other aspects of macroeconomic policymaking. We therefore argue that, adopting an IT regime without carrying out the required reforms towards eliminating the distortions in the economy is not necessarily an effective device for overall macroeconomic stability.

Fiscal adjustment and the costs of public debt service: evidence from OECD countries

Applied Economics, 2014

We use a panel of 21 OECD countries from 1970 to 2009 to investigate the effects of different fiscal adjustment strategies on long-term interest rates -a key fiscal indicator reflecting the costs of government debt service. A government confronted with high deficits and rising debt will sooner or later need to enact fiscal adjustments in order to avoid solvency problems. Over the last four decades, such measures taken by governments in OECD countries have varied in duration, size, composition and in their success to re-establish fiscal sustainability. Controlling for various economic, fiscal and political factors, we find that the size and the composition of a fiscal adjustment significantly affect interest rates as well as yield spreads. Adjustments that are relatively large and those that primarily depend on expenditure cuts lead to substantially lower long-term interest rates. However, periods of fiscal adjustments do not generally have an influence on interest rates, even if they were successful and led to lower deficits and debt levels. Instead, financial markets only seem to value strict and decisive measures -a clear sign that the government's pledge to cut the deficit is credible. JEL-Code: E62, H00, H60.

Transitional Behavior of Government Debt Ratio on Growth: The Case of Oecd Countries

Romanian Journal of Economic Forecasting, 2012

We revisit how the government debt ratio and real GDP growth relationship varies with indebted levels and two macroeconomic control variables, unemployment rate and inflation rate, in a balanced panel of 19 OECD countries over the period 1993-2007, after the signing of the EU Treaty in Maastricht on February 7, 1992. The empirical results indicate that there is one threshold value of 97.82%, which divides our sample into two regimes. The mean of the real GDP growth rates in the left regime is 1.16% higher than that in the right regime. The significantly positive marginal effects of government debt ratio on real GDP growth in both left and right regimes are consistent with the stimulus view (Eisner, 1992). Neither "debt overhang" nor "debt irrelevance" exists in these OECD countries. Our findings also show that there is a significantly negative marginal effect of unemployment rate on real GDP growth in the left regime, but significantly positive in the right regime. This positive nexus between the unemployment rate and real GDP growth in the right regime is inconsistent with Okun's Law. Meanwhile, there is a significantly negative impact of inflation rate on real GDP growth in the left regime, but non-significantly negative in the right regime. The transitional behavior from the right to the left regime in Belgium in 2006 and in Canada in 1998 is good example for the highly indebted countries, such as Italy and Japan. Therefore, our empirical findings have important implications for fiscal policymakers, not only in these OECD countries but also in the rest of world.

Sovereign Debt Management and Fiscal Vulnerabilities

A wide consensus has emerged on the role of debt management in reducing fiscal vulnerability by providing insurance against macroeconomic shocks to the government budget. Whether this goal is better accomplished by nominal or inflation-indexed debt, by a short or a long maturity structure, remains however controversial. In this paper we review the issues of indexation and debt maturity, discussing in particular the role of the maturity structure in light of integrated financial markets and the risk of default. We argue that the role of inflation-indexed debt as a hedge against demand and inflation shocks is less important when price stability is ensured by a Ricardian fiscal policy and an independent central bank. A strong case can instead be made for a long maturity structure to reduce interest-rate risk and, more importantly, the risk of default. The maturity of the debt is a key variable to assess the vulnerability of the government fiscal position and should deserve greater attention in debt sustainability analysis. Finally, we compare the theory of fiscal insurance to the debt managers' practice of minimizing the cost and risk of the interest expenditure. A concern for the cost of debt service is justified only if expected return differentials between debt instruments are determined by mispricing, market imperfections or liquidity, but not if higher risk premia reflect a fair price for insurance. Our analysis points to the danger of minimizing the interest expenditure over a short horizon as may happen in times of crisis, when the government strives to achieve budget balance. More generally, fiscal insurance cannot be evaluated using national accounts figures, such as the interest expenditure and the book value of the debt. The lack of a more theory-based accounting framework is indeed a major obstacle to optimal debt management.

Public Debt and Economic Growth in the Aftermath of the Covid-19 Economic Crisis

Regional Formation and Development Studies, 2022

The Great Financial Crisis (GFC) of 2008 to 2010 increased the size of the public debt and decreased the fiscal space. The problem stems from the fact that fiscal resources are limited. Many OECD countries had used a substantial part of their limited fiscal space. Researchers suspected that higher levels of public debt in the future could slow down GDP growth. The first attempts to detect the tipping point at which GDP growth stalls or loses steam were made right after the GFC. However, the discussion was left open. The Covid-19 crisis required the further use of unprecedented amounts of fiscal stimulus resources to stabilise the economic situation. The objective of this paper is to establish whether new data of elevated public debt levels in relation to GDP confirms that higher levels of debt to GDP have an impact on future GDP growth and future financial stability. Debt and GDP data from OECD countries for the years 2000 to 2026 was used in order to carry out multilinear regression analysis, establishing the relationship between debt and future GDP growth. The results provide compelling evidence that the accumulation of higher debt levels slows down GDP growth, and require more fiscal resources in the future to stabilise the economic situation, compared with countries with lower accumulated public debt levels. Hence, higher inflation will require even more resources to service the debt.