Debt Limits Research Articles

LAW OF LOCAL GOVERMANT: LOCAL GOVERNMENT UTILITY COMPANIES OF COMMERCIAL LAW AND THE POSSIBILITY OF THEIR DEBT

From 2014 are functioning new rules governing the possibility of borrowing of local government units (hereinafter: j.s.t.). Instead of the previous quota limits, which limits total debt and debt limit in a given year, introduced individual (calculated separately for each j.s.t.) ratio of debt repayment, which is a synthetic and depends on the current and past financial situation j.s.t.

A flow-to-equity approach to coordinate supply chain network planning and financial planning with annual cash outflows to an institutional investor

AbstractA common side effect of cross-linked global economies is that well-positioned middle class companies are acquired by institutional investors, which formulate unreasonable return expectations in many cases. As a consequence, the resulting payouts are often not in line with business operations so that even world market leaders get into trouble or close down. In this context, we consider the case of a sanitary company, which had to manage the described situation after a business takeover. In order to coordinate the annual cash outflows to the investor with intra-organizational supply chain planning and financial planning, we propose a mixed-integer non-linear programming model that is based on the flow-to-equity discounted cash flow method. The objective is to maximize the present value of equity while determining annual cash outflows to the institutional investor during his engagement. As the decisions of the investor during his engagement influence possible operations of the company after his engagement, the residual value of equity (that influences the selling price) is taken into account. The modeling is based on cash flow series, which result from supply chain operations and restructuring on the one hand, and from financial transactions on the other. Financing is characterized by interest rates depending on the time period the credit starts, the credit period, the debt limit of the company and the current total debt. As the latter is a result of the optimization, non-linearity arises. Nevertheless, both the expected demand scenario and further randomly generated demand scenarios of the sanitary company could be solved to the optimum with the commercial optimization package GAMS 23.8/SCIP 2.1.1 within acceptable computation times, if capacity profiles are assigned to the locations to depict feasible and/or preferred capacity developments.

Puerto Rico Debt Crisis: Trying to Reconcile Sanchez-Valle with the Puerto Rico Bankruptcy SCOTUS Opinions: Some Preliminary Thoughts

Puerto Rico Debt Crisis: Trying to Reconcile Sanchez-Valle with the Puerto Rico Bankruptcy SCOTUS Opinions: Some Preliminary Thoughts

Wykorzystanie funduszy Unii Europejskiej na inwestycje komunalne a ograniczanie zadłużenia samorządów

Integracja europejska w znaczącym stopniu zmieniła warunki funkcjonowania jednostek samorządu terytorialnego głównie za sprawą dostępności funduszy strukturalnych. Obecnie wiele podejmowanych przez gminy działań, szczególnie inwestycyjnych odbywa się przy udziale dofinansowania w ramach instrumentów polityki regionalnej UE. Pozyskane fundusze z jednej strony stanowią wsparcie dla lokalnych budżetów, z drugiej zaś powodują wzrost wydatków, które często finansowane są z kredytów. Celem artykułu jest identyfikacja relacji zachodzących pomiędzy zrealizowanymi przy wsparciu finansowym inwestycjami komunalnymi a nowo wprowadzonymi wskaźnikami zadłużenia. Polskie gminy cechowało duże zróżnicowanie poziomu wykorzystania funduszy UE. Nowe limity zadłużenia mogą ograniczać zdolności absorpcyjne samorządów w konsekwencji spłat odsetek od zaciąganych w przeszłości zobowiązań.

Explaining Systemic Risk in Money Market Funds: An Exploratory Study

Evaluating creation of systemic risk is an ongoing regulatory activity and a difficult task given the dynamic linkages found in the financial system among multiple counterparties. This study evaluates the contributions to systemic risk in U.S. institutional prime money market funds (MMFs) from different sources using partial least squares structural equation modeling (PLS-SEM). The four years (2011-2014) cover the period following major reforms in 2010 implemented by the U.S. Securities and Exchange Commission (SEC), and includes years of the Eurozone sovereign debt crisis (2011-2012), as well as year 2011 marking the U.S. debt ceiling crisis. The primary motivation behind this study is to trace systemic risk in MMFs to its sources and measure which types of relationships provide significant explanation. In a first application of PLS-SEM with MMFs, I illustrate how the method can be used to explain systemic risk in an effort to help regulators, managers of MMFs and investors better monitor the market. This study evaluates the contribution of prudential and macroprudential indicators to systemic risk. Findings indicate that through the crisis years (2011-2012), macroprudential indicators contribute to potential systemic risk more than prudential indicators. However, this relationship is switched during 2013-2014 when the impact of Eurozone sovereign debt and US debt ceiling crises is less noticeable. This observation suggests that macroprudential indicators that can be traced to individual MMFs (i.e., funds’ market positions) are more important in understanding systemic risk during crises, and further underlines the interconnectedness of markets.

Analyzing and Managing Fiscal Risks - Best Practices

Comprehensive analysis and management of fiscal risks can help ensure sound fiscal public finances and macroeconomic stability. This has been underscored by the global financial crisis and the more recent collapse in commodity prices, which starkly illustrate the vulnerability of public finances to risk. Indeed, over the past quarter century, governments experienced on average an adverse fiscal shock of 6 percent of GDP once every 12 years, with some of the largest stemming from financial crises. Countries need a more complete understanding of these potential threats to their fiscal position. Existing fiscal risk disclosure and analysis practices tend to be incomplete, fragmented, and qualitative in nature. A more comprehensive and integrated assessment of the potential shocks to government finances, in the form of a fiscal stress test, can help policymakers simulate the effects of shocks to their central forecasts and their implications for government solvency, liquidity, and financing needs. Comprehensive, reliable, and timely fiscal data covering all public entities, stocks, and flows are a necessary foundation for such analysis. Countries should also enhance their capacity to mitigate and manage fiscal risks. Fiscal risk management practices are often blunt, ad hoc, and too focused on imposing limits on the creation of exposures. Countries need to expand their toolkits for fiscal risk management and adopt the use of instruments to transfer, share, or provision for risks. In doing so, countries need to weigh the possible benefits from reducing their exposure to shocks against the financial and other costs of the policies that may be needed. Finally, countries should make greater use of probabilistic forecasting methods when setting long-run objectives and medium-term targets for fiscal policy. The paper illustrates how simple probabilistic tools can be used to map the uncertainty around medium-term trajectories for public debt. In combination with fiscal stress tests, these tools can provide valuable information regarding the probabilities that a country will stay within the debt ceilings embedded in their fiscal rules. The Fund is playing an important role in supporting improvements in fiscal risk analysis and management among its members. This includes technical assistance in constructing public sector balance sheets; developing institutions and capacity to identify specific fiscal risks and to quantify their potential impact; undertaking fiscal stress tests; and integrating risks into the design of medium-term fiscal targets.

The Business Subsidy Industry In Ohio

This paper critically examines Ohio Governor Kasich’s signature economic development program, the JobsOhio corporation, in light of the intellectual foundations for constitutional government and a market economy. In 2011, at Gov. Kasich’s behest, the Ohio General Assembly created the JobsOhio corporation. JobsOhio is, in essence, a quasi-private entity with a public fund that it uses to provide government subsidies for business. In some ways JobsOhio is an Enron scheme for government; “off-balance sheet” diversion of public funds to private businesses. JobsOhio operates outside the purview of public records laws, open meetings laws, ethics laws, and, after a 2014 Ohio Supreme Court decision, without regard for constitutional fiscal constraint under the Ohio Constitution. Governor Kasich promotes the non-transparent JobsOhio corporation as necessary to attract and create jobs with a development agency that “moves at the speed of business.” But the joinder of the public and private spheres is cause for concern. The character of government is at stake when the sphere of politicizable activity is unlimited and government may invest in private enterprise without limitation. Politicians promoting government subsidies for business may be rewarded with campaign contributions or worse, bribes. Businesses too may look at their bottom line and find it more profitable to invest in socially wasteful political conflict rather than the research and development that fosters economic growth and drives the economy. By chronicling the history of the Ohio Constitution, this paper provides context for Nobel Laureate in Economics James Buchanan’s “constitutional generality principle,” as an institutional safeguard to promote stability in government and foster innovation. The 1851 Ohio Constitution contains a package of at least a dozen constitutional constraints that are designed to promote generality, or fairness, in government; a balanced budget provision, debt limits, appropriation limits, constraints on public-private partnerships, and others. Ohioans adopted these provisions after a broadly reaching administrative state in 19th Century became wildly corrupt while constructing the Ohio Canal System. Not unlike JobsOhio, 19th Century legislators simply delegated decisions regarding public investment in private enterprise to administrative agencies as political cronyism grew out of hand. This paper details the ideas, persons, and events that shaped the deterioration of the package of constitutional fiscal constraints in the 1851 Ohio Constitution. The story is still unfolding on Gov. Kasich’s watch. In 2014, after a series of JobsOhio-related scandals including “sham” litigation, the Ohio Supreme Court ruled that challengers to the JobsOhio subsidy program did not have “standing” to argue that JobsOhio violates the Ohio Constitution. The Court did not identify anyone who did have standing though. Further, the Court so held despite provisions in the Ohio Constitution that forbid the lending of aid or credit from governmental entities to private businesses. Ironically, JobsOhio itself is now in charge of the constitutional revision process, as a State-created commission created to study the Ohio Constitution has a finance and taxation committee headed up by JobsOhio’s outside legal counsel. Today, the deterioration of the Ohio Constitution has given rise to a widely reaching “business subsidy industry” of, well, just about everyone: politicians, interest groups, the media, lawyers, lobbyists, accountants, bureaucrats, private industry, and, yes, voters. The situation provides context to present the roles of the players in the business subsidy industry, and to study constitutional fiscal constraint, law, economics, and politics.This paper was finished in early 2015, so it is slightly out-of-date as of its posting through the Social Science Research Network in March 2016. But the paper does provide timely context for Gov. Kasich’s time as Ohio Governor, as he finds himself on the national stage in a race for the White House.

Money Market Funds and the Prospect of a US Treasury Default

US debt ceiling crises in 2011 and 2013 were marked by significant outflows from money market funds (MMFs). This study evaluates the behavior and motivations of investors redeeming from MMFs during these crises. We find that the majority of redemptions reflect a generalized flight-to-liquidity and are, therefore, primarily a function of the liquidity needs of a fund’s investor base. Funds holding Treasury securities at greatest risk of default or with market values below their $1 share price experience flows that are insignificantly different from other funds, all else equal. We also find evidence that a significant portion of the outflows stem, not from liquidity concerns, but from an opportunistic yield play on the repo market created by the crises. Finally, we offer anecdotal evidence that the government’s guarantee of bank deposits had the perverse effect of encouraging outflows from MMFs during the 2011 crisis.

Money Market Funds and the Prospect of a U.S. Treasury Default

US debt ceiling crises in 2011 and 2013 were marked by significant outflows from money market funds (MMFs). This study evaluates the behavior and motivations of investors redeeming from MMFs during these crises. We find that the majority of redemptions reflect a generalized flight-to-liquidity and are, therefore, primarily a function of the liquidity needs of a fund’s investor base. Funds holding Treasury securities at greatest risk of default or with market values below their $1 share price experience flows that are insignificantly different from other funds, all else equal. We also find evidence that a significant portion of the outflows stem, not from liquidity concerns, but from an opportunistic yield play on the repo market created by the crises. Finally, we offer anecdotal evidence that the government’s guarantee of bank deposits had the perverse effect of encouraging outflows from MMFs during the 2011 crisis.

Fiscal Fatigue and Debt Sustainability: Empirical Evidence from the Eurozone 1980-2013

Fiscal fatigue may lead a country to stop adjusting when debt continues rising in spite of a prolonged fiscal adjustment. Once fiscal fatigue sets in, the country may stop adjusting, thus compromising debt sustainability. However, the absence of sufficient adjustment may be the consequence of governments implementing delayed adjustment as a result of the domestic policy-making process. This paper investigates the factors that will lead to delayed adjustment instead of fiscal fatigue in the face of rising debt. Strong institutions and underlying macroeconomic conditions can be useful in averting the fiscal fatigue, and lead to an improvement in the fiscal balance once the debt limit has been reached.

Money and Credit Redux

Do we need both money and credit? In models with explicit roles for payment instruments, we show the answer is no. If credit is easy money is useless; if credit is tight money can be essential, but then credit is irrelevant, and changes in debt limits are neutral — real balances respond endogenously to leave total liquidity constant. This is true for exogenous or endogenous policy and debt limits, secured or unsecured credit, and fairly general preferences and pricing mechanisms. While we also show how to overturn some results, the benchmark model suggests credit conditions matter less than some people think.

Does debt ceiling and government shutdown help in forecasting the us equity risk premium?

This article evaluates the predictability of the equity risk premium in the United States by comparing the individual and complementary predictive power of macroeconomic variables and technical indicators using a comprehensive set of 16 economic and 14 technical predictors over a monthly out-ofsample period of 1995:01 to 2012:12 and an in-sample period of 1986:01- 1994:12. In order to do so we consider, in addition to the set of variables used in Christopher J. Neely et al. (2013) and using a more recent dataset, the forecasting ability of two other important variables namely government shutdown and debt ceiling. Our results show that one of the newly added variables namely government shutdown provides statistically significant out-of-sample predictive power over the equity risk premium relative to the historical average. Most of the variables, including government shutdown, also show significant economic gains for a risk averse investor especially during recessions.

Modeling Extremal Events: A Case Study of the Kenyan Public Debt

Kenya’s public debt is sharply increasing and there are fears that in the long run, the situation in the country may, perhaps, be gravitating towards the boundaries of debt distress. This has been occasioned by the ever rising fiscal deficit as a result of high expenditure appetite and poor performance of tax revenue. In addition to that is the recent surge in mega infrastructure development which is anticipated to continue triggering uptake, and piling of more public debt. To model this phenomenon, this study has applied the Extreme Value Theory in modeling the public debt where Generalized Pareto Distribution has been used and subsequently, Value-at-Risk determined. Generally, the differenced debt stock data has been modeled by fitting the Generalized Pareto Distribution and a debt sustainability threshold has been determined as 1.263. This is interpreted to imply that the prevailing year's borrowing should not occasion a rise in public debt beyond 26.3 per cent of the previous year's level. Specifically, both the unconditional and conditional Value-at-Risk has been ascertained as 1.263 and 0.957 respectively, at α = 0.05 level of significance, which is the maximum tolerable debt limit. Further, by applying the loss function, it has been established that among the two methods, conditional Value-at-Risk is the efficient model for measuring public debt risk, connoting that at α = 0.05, the current year's borrowing, say, should occasion a public debt reduction by 4.27 per cent from the previous one for the country to vacillate within the debt sustainability realms. Finally, it is recommended that a further study be conducted by computing and using Net Present Value of debt indicators since the ones used in this study are aggregated in nominal terms.

Determinants of Debt Limits in Local Governments: Case of Poland

The paper aims at presenting both determinants and applied approaches of debt limits in local governments. There are especially characterized practices introduced in Poland in this field after 1990. Thus, significance of some economic and financial variables, which affected the debt ratio growth of local governments in Poland between 1995 and 2013, was verified. The estimated regression models imply that growth of share of the debt in the revenues was significantly affected by the financial situation in the public finance sector and in the local government sector as well as by the cost of capital there. Hence, the ability of incurring the debt could be reliant on the fiscal variables and calculated individually, as it has been introduced in Poland since 2014.

Sytuacja finansowa samorządów w Polsce a nowe zasady limitowania zadłużenia – spojrzenia makroekonomiczne

Sytuacja finansowa samorządów w Polsce a nowe zasady limitowania zadłużenia – spojrzenia makroekonomiczne

Explicit formula for the optimal government debt ceiling

Motivated by the current debt crisis in the world, we develop a stochastic debt control model to study the optimal government debt ceiling, or equivalently the optimal ceiling for government debt. We consider a government that wants to control its debt by imposing an upper bound or ceiling on its debt-to-GDP ratio. We assume that debt generates a cost for the country, and this cost is an increasing and convex function of debt ratio. The government can intervene to reduce its debt ratio, but there is a cost generated by this reduction. The goal of the government is to find the optimal control that minimizes the expected total cost. We obtain an explicit solution for the government debt problem, that gives an explicit formula for optimal government debt ceiling. Moreover, we derive a rule for optimal debt policy in terms of the optimal government debt ceiling. In an extension of the model, we find that countries with a strong positive link between debt and economic growth should have a high optimal debt ceiling. This paper provides the first theoretical model for the optimal government debt ceiling.

Bank centralny a budżet państwa – wybrane aspekty prawne

The Polish Central Bank (National Bank of Poland – NBP) performs mainly macro-economic tasks, for maintaining price levels. This Bank is not focused on tasks aimed at the interests of the State Budget. The Central Bank has a lot of power in the creation of money. It seems, there is possible to create the budgetary revenues, which are connected with the emission of money. In particular, the income from emission of coins may be determined as the budget revenue. The connection the Treasury with the Central Bank results from the historical evolution of the origin and role of the Central Bank. It is reasonable to increase the role of the treasury securities in the Central Bank activity. The Treasury Bills should be used in the open market policy leading by the Central Bank. There is the issue of changing of the Constitution of the Republic Poland in the field of limit of the public debt (60% of GDP). It seems, the Polish Constitution should not be the only constitution in the world that introduced such a limit. This limit, and the limit on annual budgetary deficit, introduces EU law. That is a sufficient legal limit.

Public Debt, Economic Growth and Inflation inAfrican Economies

AbstractWe analyse the relationship between public debt, economic growth and inflation in a group of 52African economies between 1950 and 2012. The results indicate that the limits of public debt are negatively related to economic growth and exhibit, from a given level of debt, an invertedUbehaviour regarding the relationship between economic growth and public debt. Briefly, the high levels of public debt are coincident with reduced rates of economic growth and rising levels of inflation. Our results for three specific geographical areas resemble those of the overall analysis, despite some differences. InNorthAfrican countries, the growth rates of the gross domestic product (GDP) and inflation also show an invertedUbehaviour as the ratio of public debt/GDPincreases. The highest rate of economic growth is recorded when the ratio of public debt/GDPis below 30% ofGDPand corresponds to an average inflation rate of 5.33%. An identical behaviour of theGDPgrowth rates and inflation also appears in Sub‐Saharan countries until the third interval (60–90%). However, the highest growth rate of theGDPandGDPper capita is registered when the public debt/GDPratio is in the second interval (30–60%). For the countries of theSouthernAfricaDevelopmentCommunity, the highest average rate of economic growth (6.8%) is similar toNorthAfrican countries, when the ratio public debt/GDPis below 30% ofGDP, with an average inflation rate of 11%. A number of robustness analyses were performed and the great majority of them confirm the general analysis.

Money and credit as means of payment: A new monetarist approach

We study the choice of payment instruments in a model with money and credit, where sellers must invest in a record-keeping technology to accept credit and buyers have limited commitment. Our model captures the two-sided market interaction between consumers and retailers that can generate multiple equilibria. Limited commitment yields an endogenous debt limit that depends on monetary policy. Money and credit coexist for a range of parameters, and bargaining related hold-up problems can lead to inefficiencies in the adoption of monitoring technologies. Changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants.

Coordination and Crisis in Monetary Unions*

Abstract We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to overborrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.