debt-GDP Ratio Research Articles

Threshold-based influence of currency devaluation on external debt sustainability: Insights from smooth transition regression and multiple thresholds nonlinear ARDL approaches

This study offers unique insights into the threshold-based influence of currency devaluation (CD) on external debt sustainability (EDS) in designated Sub-Saharan African (SSA) countries. The absence of evidence from this viewpoint, particularly in SSA, inspires this new assessment. On this premise, the study utilizes two innovative estimation procedures: smooth transition regression (STR) and multiple thresholds nonlinear ARDL (MTNARDL) to estimate the sign-based and magnitude-based asymmetric influence of CD on EDS. The outcomes indicate that first, an average CD threshold of 21.1% is consistent with EDS in the designated nations; second, a small CD significantly reduces the external debt–GDP ratio and improves sustainability, while a very high CD largely worsens the EDS problem; third, in the CD regime, devaluation has more detrimental effects on external debt burden; fourth, exceedingly large changes in exchange rate (whether positive or negative) essentially affect the countries’ EDS negatively; and fifth, the adverse effect of large depreciation on EDS is greater than that of large appreciation. The study recommends, amongst others, that heavily indebted countries with sizeable external debt denominated in foreign currency should, as a matter of urgency, avoid excessive and escalated large percentages of devaluation or exchange rate depreciation.

What drives public debt in SAARC countries? An empirical assessment

PurposeThis study aims to explore the determinants of public debt in selected South Asian Association for Regional Cooperation (SAARC) countries for 19 years, from 2001 to 2019.Design/methodology/approachUsing ordinary fixed and random effect models, the authors examine the role of internal and external factors in determining the composition of public debt. Furthermore, for robustness, they compare the results with two-stage least square (2SLS) regression estimates after considering the problem of endogeneity, overidentification, under-identification and weak instruments.FindingsThe findings show that among the selected macroeconomic variables, inflation, exchange rate and broad money have significant negative effects on the debt-GDP ratio. In contrast, military spending, corruption and interest rates appear to positively influence the same as per 2SLS results. From the policymaking perspective, SAARC countries should focus more on reducing military spending and make a concerted effort to augment investments in productive projects. Further, with strong fiscal consolidation and institutional quality, it is important to mitigate the frequent occurrence of corruption conundrums in emerging economies for the development of a transparent economic system.Originality/valueThe study is distinct from previous studies in two ways. First, to the best of the authors’ knowledge, there are no studies focusing on SAARC countries in the context of public debt. Second, the study expands the existing literature on public debt by taking into account both external and internal debts to decipher the within-country and cross-country determinants of debt accumulation. More specifically, this model considers accountability and transparency in the public sector, cross-border security challenges and benefits of globalization by including explanatory variables such as corruption, military expenditure spending and capital inflows.

Fertility, fiscal deficit, and sustainability of public debt in an endogenous growth model

This aim of this study is to construct an overlapping-generations model to clear the effects of fiscal deficit on fertility. We reveal the relation between fiscal deficit and fertility and clarify the mechanism of fiscal deficit reducing fertility. Empirical evidence shows that an increase in debt-GDP ratio mitigated fertility. Our model indicates that fiscal deficit has positive and negative effects on fertility through the change of income tax rate. Numerical simulation shows that an increase in fiscal deficit reduces fertility. Therefore, this result is consistent with the empirical evidence. In addition, this study demonstrates that a steady state would not exist if child allowance for child-rearing costs would exceed the critical level. This result implicated that an expansion of the child allowance aimed for countermeasures to the falling birthrate can make sustainability of public debt unstable. Thus, countermeasures should be formulated to address the falling birthrate depending on the fiscal situation.

Portfolio capital flows and economic growth: Do institutional factors matter?

This paper examines the impact of institutional qualities on country-specific pull versus push factors on portfolio flows and growth. The interplay among economic policy uncertainty (EPU), host country’s institutional quality and growth are systematically studied. The analysis reveals that social institutions matter in toning down risks associated with global interest rate. Political stability is vital in moderating the negative effects linked to EPU, while social cohesion mitigates the stressful (negative) effects of soaring debt–GDP ratios. Institutions and domestic conditions serve as devices to partially insulate economies from stress conditions, including the spillovers from the unconventional monetary policy originating from the frontier countries. Policy responses should emphasize on reforming institutions to smooth the fluctuations of portfolio capital inflows and to procure stronger growth. The empirical results show that democracy matters in the growth empiric. The economic-enhancing benefits of portfolio investments remain fairly robust to several measures of institutions.

AD-AS Analysis from the Perspective of Functional Finance Theory and MMT

Abstract Research background In the past few years, MMT (Modern Money Theory or Modern Monetary Theory) has been increasingly discussed in Japan as well as in the U.S. However, both in the U.S. and Japan, analysis using mathematics is lacking and analysis using IS-LM and AD-AS analysis methods in macroeconomics is almost non-existent. Purpose We present an AD-AS analysis from the perspective of Functional Finance Theory and MMT (Modern Monetary Theory). Research methodology Graphical analyses with some mathematical analyses. Mathematical analyses include graphic analysis using AD and AS curves and calculations to derive equations representing them based on models of consumer and firm behavior. Results Using an overlapping generations model under monopolistic competition we show the following results by calculations and graphical analyses. 1. The budget deficit (including interest payments on government bonds) equals an increase in the savings of consumers from period to period. This result means that the debt-GDP ratio would not diverge to infinity, but would remain at a finite value whether the interest rate of government bonds is larger or smaller than the growth rate. 2. We need a budget deficit (including interest payments) to maintain full employment without inflation under economic growth. However, if the interest rate of government bonds is larger than the growth rate, we need a budget surplus (excluding interest payments) to maintain full employment without inflation. 3. A return to full employment from a recession can be achieved by implementing the appropriate fiscal policies through increased government spending or tax cuts. 4. Excessive government expenditure or an insufficient tax under full employment induces inflation. Novelty This is probably the first AD-AS analysis done from the standpoint of Functional Finance Theory and MMT.

Don’t worry about the debt-GDP Ratio

I will show that if the propensity to consume from savings satisfies appropriate conditions, the debt-GDP ratio will not grow infinitely large and fiscal collapse will not occur. Using a basic macroeconomic model, with an overlapping generations model in mind, we show the following results: 1) The budget deficit including interest payments on the government bonds equals an increase in the savings from a period to the next period. 2) If the savings in the first period is positive, we need budget deficit to maintain full employment under constant prices or inflation in the later periods. 3) Under an appropriate assumption about the propensity to consume from savings, the debt-GDP ratio converges to a finite value. It does not diverge to infinity. The larger the propensity to consume from savings, the smaller the budget deficit required to achieve full employment. The larger the propensity to consume from savings, the less likely it is that the debt-GDP ratio will become large.

Sri Lankan Debt Crisis: The Role of Fiscal Deficit and Current Account Deficit

This paper examines the relationship between the debt-GDP ratio and twin deficits during 1971-2021 in the context of the present economic crisis in Sri Lanka using the techniques of cointegration and error correction model. The results of the study indicate the existence of a long run relationship among these variables. A fiscal deficit tends to increase the debt-GDP ratio in the long run, whereas in the short run, there is no evidence of any impact of fiscal deficit on the debt-GDP ratio. A current account deficit is expected to raise the debt-GDP ratio in the short run; but in the long run, it seems to have a significant negative impact. Similar results are obtained when the relationship among debt-GDP ratio, fiscal deficit and trade deficit is investigated. Hence, the view that opines persistent high fiscal deficit as the main cause behind the crisis, is supported by the present study. The results advocate for utilizing a country’s own resource generating methods like taxation rather than using external debt as a source to finance deficits.

Institutions Determine Debt–Growth Relationship: Evidence from Fourth Wave of Debt in EMDEs

ABSTRACT The last decade witnessed global debt levels to reach record high. In Emerging Market and Developing Economies (EMDEs) like never before, the (public and private) debt–GDP ratio has been dismally high. An upward spree of the debt–GDP ratio coupled with a looming economic crisis led to concerns about institutional qualities (IQ). We explore how different dimensions of IQ (namely, political, legal and governance) impact the debt–growth relationship in the EMDEs amidst the current fourth wave of debt (2010–2019). We examine whether the relation is monotonic or it varies around a particular threshold value of IQ. By applying a dynamic panel threshold regression model, we obtain two regime-dependent marginal effects of regressors (upper and lower regimes) that are distinguished by a threshold value of IQ. Our results reveal that for each of our considered IQ, there exists a statistically significant threshold value. For public debt, across all dimensions of IQ debt hurts growth in the lower regime, while in the upper regime the association is favourable. While private debt is growth enhancing in the lower regime of all IQs (excepting corruption), while it is inimical in the upper regime.

Debt redemption fund and fiscal incentives

We investigate a stochastic optimal control model for the management of public debt when part of the national debt is transferred to a Redemption Fund, which is allowed to finance itself in the market at a low interest rate, in exchange of the commitment to a fiscal consolidation plan by the national government both for the national debt and the Fund. The Fund is an interesting option for countries with high debt–GDP ratio and weak fundamentals. However, we show that it is not a free lunch in a sense that a country with a higher public debt should transfer a larger amount of resources to cut down the Fund. We calibrate the model to the experience of Euro zone countries with a high debt, showing that it is possible to design the mechanism allowing to pay back the Redemption Fund and stabilizing both the national debt and the fiscal surplus with a reduction of the fiscal effort.

Testing explosive bubbles with time-varying volatility: The case of Spanish public debt

In this paper the dynamics of the Spanish public debt-GDP ratio is analysed during the period 1850–2021. We use recent procedures to test for explosive bubbles in the presence under time-varying volatility (Harvey et al., 2016; Harvey et al., 2019, 2020; Kurozumi et al., 2022) in order to test the explosive behavior of Spanish public debt over this long period. We extend previous analysis of Esteve and Prats (2022) where assume constant unconditional volatility in the underlying error process.

A NOTE ON PUBLIC DEBT-PRIVATE INVESTMENT NEXUS IN EMERGING ECONOMIES

We examine the effect of public debt on private investment in selected emerging economies. Using a panel threshold regression model, we estimate a threshold value of about 3 percent, on average, below which public debt stimulates private investment. Our additional analysis involving selected developed economies suggests that the crowding out effect is less evident relative to the emerging economies as higher public debt stocks do not seem to significantly undermine their private investments. These results have implications for debt sustainability and maintaining a reasonable public debt–GDP ratio is crucial for sustainable investment growth.

How might the United Kingdom's debt–GDP ratio be reduced? Evidence from the last 120 years

AbstractThis article examines how the currently high level of the UK's debt–GDP ratio can be reduced. We consider whether anything can be learned from previous experience over the last 120 years by examining the contributions both to the increase in the debt–GDP ratio and to the reduction of the debt–GDP ratio by various components of the government budget constraint: the primary surplus, growth, inflation, and interest rates and payments. We also examine the effectiveness of policy in influencing these components. We conclude by considering what level of UK debt might be sustainable and whether this is economically and politically achievable.

Fiscal adjustment in a panel of countries 1870–2016

The financial crisis from 2007 and, even more so, the Covid-19 pandemic caused large increases in public sector deficits and debts in many countries and prompted concern about fiscal adjustment. This paper examines fiscal adjustment to debt and deficits for a panel of 17 countries over 1870–2016 using the Jordà–Schularick–Taylor Macrohistory Database. This long span panel is informative since it contains many examples of large fiscal shocks similar to those recently experienced. The results from reduced-form models suggest that large deficits or surpluses tend to prompt stabilising feedbacks, mainly through changes in revenue, and there is greater pressure to adjust on countries running a deficit versus those running a surplus. However, the debt–GDP ratio prompts much less stabilising feedback by expenditure or revenue.11I am very grateful to Professor Ron P. Smith (Birkbeck, University of London) for all the useful comments and providing truly invaluable support in writing this paper. I also greatly appreciate very useful comments provided by an anonymous referee that helped to further enrich the paper.

Role of debt in emerging economies: a re-examination of the debt-growth nexus

ABSTRACT Traditionally, a higher debt burden is expected to negatively affect the economic growth, although the empirical evidence is inconclusive. In this paper we have re-examined the debt-growth relationship for 32 emerging economies while considering possible nonlinear impact of debt on economic growth using a dynamic panel. Our results suggest that for emerging economics, a large debt if used efficiently, can lead to significant positive economic growth. This relationship remains unchanged even when we control for other macroeconomic variables. We have also identified three different threshold debt-GDP ratios for the one, two and three period lags of debt and found an asymmetric impact of debt between above-threshold and below-threshold countries.

FISCAL SUSTAINABILITY AND ECONOMIC GROWTH: A CASE STUDY OF UTTAR PRADESH IN THE 21ST CENTURY

Fiscal sustainability refers to the maintenance of public finances within an affordable and serviceable limit by rationalising debt and deficits within tolerable limits. India, since the time of independence has been taking assistance of debt and deficits to meet its shortages in revenue for the purpose of development and growth. For quite a long time, the concept of fiscal prudence was not given due importance of its role in ensuring long-term sustainable growth. It was only after the major economic crisis of 1990s, that several reforms were initiated targeting at longer duration targets. As a part of series of these reforms, FRBM Act was implemented in 2003 to keep a check on the fiscal indicators of the country especially the revenue deficit, fiscal deficit and debt-GDP ratio to contain the situation of growing fiscal indiscipline. The act was implemented both at the Centre and State level. It has almost been a decade and a half since its implementation. In the course of this duration, some states focused more on the growth parameters while other states focused more on the fiscal sustainability which in turn will initiate growth according to the ideology behind it. The present study specifically makes an analysis of the policies adopted by the state of Uttar Pradesh to establish fiscal sustainability. An investigation has been done to evaluate whether fiscal sustainability measures have adversely affected the growth of the state? The study concludes that although Uttar Pradesh is the most populous and one of the largest state, area wise, it could not create an investment atmosphere for investors due to lack of infrastructure and other facilities because of its focus on fiscal sustainability. KEYWORDS: Fiscal Sustainability, FRBM Act, debt-GSDP ratio, fiscal deficit, interest payments.

Evolution of Government Debt and Its Sustainability in Japan and Germany: Two Contrasting Cases

We examine the contrasting evolution of government debt-GDP ratio for Germany and Japan. While Germany contained the growth of its debt-GDP ratio close to its sustainability level over a long period, Japan has slipped away towards non-sustainability. This is due to the behaviour of primary balance to GDP ratio. The estimated debt sustainability thresholds are 62.0% for Germany and 176.0% of GDP for Japan. In the post Covid years, Germany would converge back to its debt sustainability level almost automatically whereas Japan will have to make a strong conscious policy effort to reduce its primary deficit relative to GDP.

Examining Sustainability of Government Debt in India: Post COVID Prospects

In this paper, we examine the determination of the sustainable level of debt-GDP ratio for the combined debt of central and state governments relative to GDP using (a) an analytical approach which was followed by the Twelfth Finance Commission (FC 12) and (b) an econometric model using threshold estimation. These methods provide results which are quite close to the target debt-GDP ratio of 60% determined by the Fiscal Responsibility and Budget Management (FRBM) review committee of 2018. In order to understand the evolution of government debt in India, we have divided the period from 1991-92 to 2018-19 into two sub-groups (A) consisting of years where a primary deficit was incurred; and (B) years where a primary surplus was shown. In the case of India, all years are characterized by primary deficit. These years are further divided into three sub-categories based on the contribution to the debt-GDP ratio made by (i) primary balance and (ii) excess of nominal growth rate over interest rate. The approach used here provides a modified view of the dynamics of debt as explained by the contribution of cumulated primary deficit and that of the excess of nominal growth over interest rate which was used in Rangarajan and Srivastava (2004). We have shown that this dynamics is well captured by an ARDL estimation which estimates the individual contribution of each of the contributing factor to debt accumulation namely primary deficit to GDP ratio, lagged debt-GDP ratio, nominal GDP growth rate and interest rate. We find that government debt in India is likely to exceed the sustainable debt-GDP threshold by a large margin in the post Covid years and even after normalcy is restored, it would take a long period for sustainability to be restored. It would also require that adequate policy measures are taken to ensure that growth rate exceeds the interest rate over long contiguous periods.

Fiscal financing components in a simple model of policy interaction

Post-Great Recession many advanced nations have experienced an unprecedented rise in debt-to-GDP ratios. Among other factors, increasing age-related spending can add to fiscal stress with a high peacetime debt-GDP ratio. Therefore, it is crucial to understand the factors that can affect the debt dynamics. Previous literature highlights the components affecting the debt-GDP ratio as nominal interest rate, inflation, growth rate, and primary deficit/surplus. However, the contribution of these financing components was calculated without any reference to policy regimes. This paper calculates the financing components and their distribution under two regimes: “active” fiscal and “passive” monetary policy (“F”) and “active” monetary and “passive” fiscal policy (“M”) using US data between 1942 and 2017. The results show that inflation, growth rate, and primary deficit have played essential roles in affecting the debt-GDP dynamics under regime F.

Revisiting Fiscal Responsibility Norms: A Cross Country Analysis of the Impact of COVID-19

In this paper, we have reviewed the COVID induced shock to the debt and deficit profiles of 10 of the largest economies by size of GDP in 2019 referred to in this paper as the Big-10 economies. There is a sharp upsurge in their government debt-GDP ratios because their policy responses to the COVID induced recession have been large fiscal stimuli based on borrowing. With low and often negative growth rates and high fiscal deficit, the debt-GDP ratios are projected to rise sharply in these economies. As normalcy is restored, these countries may attempt to sharply reduce their borrowing levels relative to GDP. However, we argue that before this is done, individual countries may do well to reassess their sustainability norms whether cast in terms of agreements such as the Maastricht Treaty or country level Fiscal Responsibility Legislations (FRLs) or other similar norms. This revision is called for because of the longer-term trends in these economies of rising money supply, falling nominal interest rates and nominal growth rate. The contribution of this article lies in highlighting that the existing FRL norms have become dated in the European and other similar economies because of significant changes in macro parameters such as the interest rate, the long-term growth rate and the government debt-GDP profiles of these countries as compared to the time when these norms were originally determined. There is thus a need now to re-determine these norms which may be higher than their current levels. Even though, some recent literature suggests that the sustainability benchmarks may have shifted upwards, we argue that the post COVID debt-GDP ratios have exceeded these revised benchmarks by significant margins in the case of a number of the Big-10 economies.

Who bears the burden of universal health coverage? An assessment of alternative financing policies using an overlapping-generations general equilibrium model.

In their quest for universal health coverage (UHC), many developing countries use alternative financing strategies including general revenues to expand health coverage to the whole population. Unless a policy adjustment is undertaken, future generations may foot the bill of the UHC. This raises the important policy questions of who bears the burden of UHC and whether the UHC-fiscal stance is sustainable in the long term. These two questions are addressed using an overlapping generations model within a general equilibrium (OLG-CGE) framework applied to Palestine. We assess and compare alternative ways of financing the UHC-ridden deficit (viz. deferred-debt, current and phased-manner finance) and their implications on fiscal sustainability and intergenerational inequalities. The policy instruments examined include direct labour-income tax and indirect consumption taxes as well as health insurance contributions. Results show that in the absence of any policy adjustment, the implementation of UHC would explode the fiscal deficit and debt-GDP ratio. This indicates that the UHC-fiscal stance is rather unsustainable in the long term, thus, calling for a policy adjustment to service the UHC debt. Among the policies we examined, a current rather than deferred-debt finance through consumption taxation emerged to be preferred over other policies in terms of its implications for both fiscal sustainability and intergenerational inequality.