Average Debt Levels Research Articles

ASSESSMENT OF PUBLIC DEBT DRIVERS IN THE BALKANS

This study investigates the main drivers of public debt and assesses the overall debt structure in the Balkan countries. Regardless of a close to 50% average debt level, there is no immediate threat of escalation compared to developed countries. The empirical analysis leverages three advanced econometric techniques to control for cross-country specifics and potential biases due to data disruptions. Sourced from the World Bank and the International Monetary Fund, the data are of quantitative type collected from 2000- 2021. Empirical evidence suggests that Real GDP Growth and Current Account balance are crucial determinants of economic performance, with political regimes also exerting a notable influence. As the time frame of the research consists of the COVID-19 pandemic, it is essential to consider structural breakdowns to avoid any coefficient biases. Unsurprisingly, the dummy variable COVID-19 depicts a significant effect as public debt increased by 2.51 percentage points once the pandemic occurred. The rest of the variables, including interest rates, government expenditure, and unemployment rate, are statistically insignificant. Empirical evidence from the present study supports the hypothesis that pursuing genuine economic development through the advocacy of domestic production and trade, coupled with the consolidation of democratic institutions, can act as a check on the spiraling growth of public debt.

The Bribe Rate and Long Run Differences in Sovereign Borrowing Costs

The average cost of borrowing on international financial markets varies widely from nation to nation even after controlling for the varying levels of indebtedness of their governments. This suggests that markets assign country specific default risk assessments. In this paper we focus on one natural source of this difference – the quality of their institutions. We begin by showing that the average sovereign spread is positively related to the average percentage of a government contract that must be given as a “gift” in order to secure the contract. We then build a sovereign default model where the government is constrained to use corrupt bureaucrats to deliver public goods and services and manage its accounts. Using the gift data as a measure of the public resources diverted by bureaucrats, and the Rule of Law index as a measure of institutional quality, we estimate the diversion policy of bureaucrats and use it to calibrate our model to international data. We use the model to generate an artificial international data set where countries vary only in the institutional quality parameter. Running the same regressions on our artificial data, we find that average spreads are positively associated with the bribe (gift) rate and with average debt levels. The model implies that when revenue streams are low, a benefit of default is that public services net of bureaucratic diversion actually increase. Since the net gain in public services obtained by defaulting is decreasing in the level of institutional quality, international lenders assign lower default risk to those countries.

The ECB Under the Threat of Fiscal Dominance – The Individual Central Banker Dimension

Abstract This paper examines the threat of fiscal dominance for central banks with a focus on the individual dimension. A general symptom of fiscal dominance is a feedback loop from sovereign debt developments to monetary policy decisions. Our theoretical reasoning clarifies under which assumptions the individual members in a federal central bank system should pay particular attention to their home regions’ public debt situation. We present empirical evidence for the existence of such a repercussion in the context of the ECB Council. Based on public statements regarding the Pandemic Emergency Purchase Programme (PEPP), we classify the governors of the euro area national central banks (NCB) and the ECB board members as “hawks”, “neutrals,” and “doves”. We correlate the resulting classification with their home countries’ debt level. The resulting pattern is consistent with what can be expected for a regime of fiscal dominance. Whereas the doves tend to come from high-debt countries, the average debt level of the hawks’ home countries is significantly lower. As expected, this pattern is even more pronounced for the NCB presidents than for board members.

Income contingent student loan design: Lessons from around the world

The use of income contingent loans (ICLs) for Higher Education (HE) students is becoming increasingly prevalent around the world. Using a model of simulated lifetime earnings for graduates, in this paper we show that the impact of the design of ICLs on the magnitude and distribution of government subsidies is highly dependent on the institutional setting. In particular, the average debt level as a share of average earnings is a key determinant of the impact of various policy parameters. The variance of earnings within the graduate population is also shown to be a determinant of ICL taxpayer costs. This paper is the first comparative exercise of impact of the design of ICLs in different settings, and the findings are highly relevant to countries looking to implement or reform their student loan systems.

Effects of debt mutualization in a monetary union with endogenous risk premia: Can Eurobonds contribute to debt stabilization?

This paper analyses debt stabilization in a monetary union that features endogenous risk premia. In particular, debt stabilization in two diametrically opposed regimes is compared. In the first regime, the “national fiscal discipline regime”, financial markets impose sovereign risk premia based on each country's government debt level. In the second regime, the “Eurobonds regime”, financial markets impose a risk premium based on the average debt level in the monetary union. Outcomes in both regimes are compared using simulations of a number of relevant scenarios.

Uma análise da situação financeira da indústria brasileira de aviação civil

ResumoA indústria brasileira de aviação civil tem voado baixo. O setor apresentou repetidos desempenhos financeiros negativos em 2011, 2012 e 2013, resultando em nível de endividamento médio muito acima do patrimônio líquido. Este estado de coisas não pode ser mantido, sob pena do setor ir à falência. A falência de companhias líderes do setor decerto trará graves consequências para a economia nacional. Este artigo estima a Demonstração do Resultado do Exercício de 2014 do setor. Há que ser dito que os demonstrativos financeiros de 2014 ainda não estão disponíveis. O método usado foi o de simulação de cenários, com o emprego de software específico de simulação Monte Carlo. A variável de risco foi a receita de passagens e a ela foi associada uma distribuição de probabilidade triangular. Os resultados simulados não são encorajadores. A probabilidade de o lucro líquido setorial ser negativo em 2014 é de aproximadamente 40%. Pode-se dizer que o setor balança no abismo da falência. Os resultados desta pesquisa servem de alerta para as autoridades responsáveis pelo controle e acompanhamento das atividades do setor de aviação civil do Brasil.

Sovereign borrowing, financial assistance, and debt repudiation

Official lenders provide financial assistance to countries that face sovereign debt crises. The availability of financial assistance has counteracting effects on the default incentives of governments. On the one hand, financial assistance can help to avoid defaults by bridging times of fundamental crises or resolving coordination failures among private investors. On the other hand, the insurance effect of financial assistance lowers borrowing costs, which induces the sovereign to accumulate higher debt levels. To assess the overall effect of financial assistance on the probability of default, we construct a quantitative model of endogenous credit structure and sovereign default that allows for self-fulfilling expectations of default. Calibrating the model to Argentinean data, we find that the availability of financial assistance reduces the number of defaults that occur due to self-fulfilling runs by private investors. However, at the same time, it raises average debt levels causing an overall increase in the probability of default.

Creating Financial Capability in the Next Generation: An Introduction to the Special Issue

The Great Recession revealed the financial vulnerability of millions of US households. In its aftermath, researchers and policymakers have turned their attention to improving the next generation's knowledge of personal finance and its access to secure financial offerings (US Department of the Treasury 2014). Nearly all experts agree that such efforts should start early in children's lives. Less clear, however, is the age or stage at which to start these processes, and no consensus has identified the programs and policies best suited to accomplish this important goal. This special issue of The Journal of Consumer Affairs, which we developed in collaboration with the Financial Literacy and Education Commission (FLEC), presents a collection of studies that explore starting early to develop financial capability. The concept of financial capability combines people's ability to act with their opportunity to act in their best financial interests (Sherraden 2013, 3). It takes into account what people know and the skills they have to manage their financial affairs. And it also takes into account opportunities to improve their financial well-being. People need both--financial ability (i.e., knowledge and skills) and financial inclusion (i.e., safe and appropriate financial policies, products, and services)--to build financially secure and hopeful lives. THREE TRENDS Efforts to increase financial capability are occurring in the context of three trends. The first is the rising complexity of everyday financial decision making. Recent national surveys show that the financial knowledge and skills of Americans, including those of young people, are not keeping pace with the demands of financial life (FINRA Investor Education Foundation 2013; Lusardi, Mitchell, and Curto 2010; Mottola 2014). People are often unprepared to use the quickly expanding array of available financial products and services. These include mainstream and alternative financial products as well as emerging technologies in financial services. With the entrance of big box stores and mobile technology into financial services, the landscape is changing and it is becoming easier for people to conduct financial transactions without a traditional bank account, yet these new offerings add to the complexity (Tabuchi and Silver-Greenberg 2014). Although young people likely have an advantage over older generations in making sense of emerging technologies, the proliferation of products and platforms challenges the understanding and skills of many. A second trend is that young people confront high-stakes financial decisions earlier in life than was common a generation ago. For example, many take on levels of student debt and other debt that their parents did not experience at their age. They are often unprepared to make such critical financial decisions, which can have profound impacts on educational, vocational, and financial well-being over the life span (Emmons and Noeth 2014). For example, the share of young households (headed by someone under age 40) with student loan debt increased from 22.4% in 2001 to 38.8% in 2013, and average debt levels nearly doubled during the same period, rising from $16,900 to $29,800 (Bricker et al. 2014). Although the economic advantages of postsecondary credentials are clear and some loan programs consider a borrower's income in setting payment levels, the age at which a youth takes on student debt is correlated with the size of the debt, and high debt makes it difficult to develop a solid financial footing (Elliott and Nam 2013; Huang et al. 2015). The difficulty is even greater for youth who accumulate education debt but do not graduate. A third trend is that many families with children are struggling financially. Young and minority families fared poorly in the Great Recession (Emmons and Noeth 2014), and one in five children lives in poverty (Gabe 2014). In the low-wage job sector, many families lack workplace benefits such as insurance and retirement savings (Crain and Sherraden 2014). …

Debt Stabilization and Debt Mutualization in a Monetary Union with Endogenous Risk Premia

In this paper we analyse debt stabilization in a monetary union that features endogenous risk premia. In particular, we analyse debt stabilization in two diametrically opposed regimes. In the first regime, the “national fiscal discipline regime”, financial markets impose sovereign risk premia based on each country’s government debt level. In the second regime, the “eurobonds Regime”, financial markets impose a risk premium based on the average debt level in the monetary union. We compare outcomes in both regimes using simulations of a number of relevant scenarios.

Income Tax, Income Contingent Education Loans and the Taxpayer Parallax

In designing tertiary education income contingent loans (ICL), primary attention has been focussed on designing arrangements which improve access to and affordability of education. In contrast, much less attention has been given to how best to design the repayment of those loans in a way which minimizes any adverse behavioural response by ICL debtors. With more governments moving to increase the student contribution to the cost of their education, the likely magnitude of an individual’s ICL debt can not only impact their education take-up, but once incurred can result in adverse behavioural responses during the ICL debt decumulation phase. This paper argues that two main factors drive the behaviour of those with an ICL debt during the decumulation phase. The first is the basis for determining ICL repayment (including base, rates and thresholds) and the second is the size of an individual’s ICL debt. Just as the interaction between tax rates and transfer means tests combine to adversely impact the transition from welfare to work, the interactions between ICL debt level, repayments and personal income tax can adversely impact the transition from study to work, with implications for ICL repayment and income tax compliance. To provide insight into these issues, the 2011-12 Australian Taxation Office 2% sample unit record file of individual tax returns is examined for differences firstly between Australian taxpayers with and without a Higher Education Loans Program (HELP) debt, and secondly, between those taxpayers with varying levels of HELP debt but comparable income levels. While some strong evidence was found for differences between HELP and non-HELP debtors from the Australian data, the paper highlights the need for more research into this issue before conclusive findings can be made that ICL debt does influence taxpayer behaviour. Such research should be a high priority because in the Australian case, between 2011-12 and 2017-18, HELP debtors are expected to increase 95% and average debt levels 41%.

The economic, financial and legal situation of private estates in Poland during the interwar period

Abstract The bad economic situation for agro-forest farms in Poland during the interwar period was caused by war damage, a global economic crisis, crop failure, indebtedness prior to World War I, and by tribute payments towards rebuilding the country. Although the timber harvest was substantial, farm owners were forced to take loans. In 1938, the debt level of agro-forest farms accounted for 18 per cent of their total value. The average debt level for this period oscillated between 9.8 and 126.0 PLN/ha-1. The assistance programme implemented by the government provided for a reduction in the interest rate of loans, particularly for farms with an area up to 300 ha.

Capital Structure and Employment Flexibility

This paper uses a unique panel dataset to establish a causal relationship between the use of flexible contractual arrangements with labor and capital structure of the firm. Using the exogenous inter-temporal variation from government subsidies, I find that hiring more temporary workers leads firms to have more debt. Since temporary workers, unlike permanent ones, can be fired at a much lower cost during their contract duration, or their contracts may be not extended upon expiration, a firm can more easily meet its interest payments and avoid bankruptcy when faced with a negative shock. I interpret this result as evidence of flexible workforce decreasing operating leverage which, in turn, promotes financial leverage. The economic magnitude of the effect is large. A thought experiment of completely prohibiting an average firm from offering temporary employment contracts would suggest that it should reduce its debt level by 4.9 percentage points, which is about 8% of the average debt level across firms. Given the overwhelming extent of labor reforms in continental Europe in recent years that touch upon the incentives to use different employment contracts and are aimed at offering more job security to workers, it is important to understand how such policies would affect firms.

DEBT, POLICY UNCERTAINTY, AND EXPECTATIONS STABILIZATION

This paper develops a model of policy regime uncertainty and its consequences for stabilizing expectations. Because of learning dynamics, uncertainty about monetary and fiscal policy is shown to restrict, relative to a rational expectations analysis, the set of policies consistent with macroeconomic stability. Anchoring expectations by communicating about monetary and fiscal policy enlarges the set of policies consistent with stability. However, absent anchored fiscal expectations, the advantages from anchoring monetary expectations are smaller the larger is the average level of indebtedness. Finally, even when expectations are stabilized in the long run, the higher are average debt levels the more persistent will be the effects of disturbances out of rational expectations equilibrium. © 2012 by the European Economic Association.

Debt, donors, and the decision to give

Despite the enormous size of the nonprofit sector, there has been very little empirical research done on the capital structure of nonprofit organizations, and no one has examined the potential effects of borrowing on individual contributions. Using a representative sample of nonprofits, the empirical analysis first determines whether secured or unsecured borrowing by nonprofits influence future contributions. The results for the full sample support a “crowding-out” effect. When the analysis is repeated on a subsample of nonprofits that are older, larger, and more dependent upon donations, the results are more ambiguous: secured debt has little or no effect, while unsecured debt has a “crowd-in” effect. The empirical analysis is then expanded to test whether nonprofits with higher than average debt levels have different results than nonprofits with below average debt levels. The results suggest that donors do remove future donations when a nonprofit is more highly leveraged compared to similar organizations.

Debt, Policy Uncertainty and Expectations Stabilization

This paper develops a model of policy regime uncertainty and its consequences for stabilizing expectations. Because of learning dynamics, uncertainty about monetary and fiscal policy is shown to restrict, relative to a rational expectations analysis, the set of policies consistent with macroeconomic stability. Anchoring expectations by communicating about monetary and fiscal policy enlarges the set of policies consistent with stability. However, absent anchored fiscal expectations, the advantages from anchoring monetary expectations are smaller the larger is the average level of indebtedness. Finally, even when expectations are stabilized in the long run, the higher are average debt levels the more persistent will be the effects of disturbances out of rational expectations equilibrium.

The impact of firm and industry characteristics on small firms’ capital structure

We study the impact of firm and industry characteristics on small firms’ capital structure, employing a proprietary database containing financial statements of Dutch small and medium-sized enterprises (SMEs) from 2003 to 2005. The firm characteristics suggest that the capital structure decision is consistent with the pecking-order theory: Dutch SMEs use profits to reduce their debt level, and growing firms increase their debt position since they need more funds. We further document that profits reduce in particular short-term debt, whereas growth increases long-term debt. We also find that inter- and intra-industry effects are important in explaining small firms’ capital structure. Industries exhibit different average debt levels, which is in line with the trade-off theory. Furthermore, there is substantial intra-industry heterogeneity, showing that the degree of industry competition, the degree of agency conflicts, and the heterogeneity in employed technology are also important drivers of capital structure.

What Level of Public Debt Could India Target?

This paper discusses possible medium-term public debt targets for India, based on evidence from the economic literature on prudent levels of public debt and the feasibility for the country to meet a particular target over the next 5-6 years. While recognizing the challenges in determining an appropriate debt target, cross-country analysis and simulations suggest that a debt ratio in the range of 60-65 percent of GDP by 2015/16 might be suitable for India. Such a debt ceiling, while still above the average debt level for emerging markets, is within the range of debt ratios that would provide room for countercyclical fiscal policy and contingent liabilities. It would also send a strong signal of the government's commitment to fiscal consolidation by making a clear break with the past.