Debt Laffer Curve Research Articles

The euro area sovereign debt crisis and the sovereign debt Laffer curve: a historic assessment for 1999–2014

This article addresses the historical evolution of sovereign debt trajectories since the beginning of the euro area up to the corresponding sovereign debt crisis, using certain key economic concepts previously proposed by the literature in connection to other historic sovereign debt events. It first recovers the concept of the sovereign debt Laffer curve, which efficiently addresses the non-linear relationship between economic output and public debt issuance. It then presents an important set of theoretic economic concepts that accurately describe the onset of debt vulnerabilities negatively impacting economic growth, therefore linking these fundamental but heterogeneous public debt-related concepts under the unifying concept of the said sovereign debt Laffer curve, which adequately encompasses these heterogeneous concepts. For example, fundamental concepts such as debt vulnerability, ‘debt overhang’, or ‘illiquidity vs. insolvency’ are adequately contextualized under the said Laffer curve. This innovative historical perspective might be useful in the analysis of subsequent sovereign debt crises, as well as in tackling future research in public debt sustainability, namely where the design and implementation of sustainable public debt policies in advanced economies is concerned.

Attaining Economic Growth Through Financial Development and External Debts: Evidence from Emerging Economies

Current study examines whether in emerging countries, financial development (FD) and external debts (EXD) has an impact on the economic growth (EG) collectively by focusing on two main debt theories i.e., debt overhang theory by Krugman & Debt-Laffer curve. Annual data on external debts (EXD), financial development (FD), trade openness, inflation, capital formation, debt servicing, population growth and economic growth are derived from the “World Development Indicators” (WDI) from the year 1980 to the year 2019 for the emerging countries: Brazil, China, Indonesia, Mexico, South Africa, Turkey, Nigeria, Pakistan, Poland, Russia, Thailand. Autoregressive distributed lag (ARDL) model is used to estimate the long-run relationships among the variables in the model, and the effect of EXD on EG is determined using the pool mean group (PMG) model. This study shows the negative and significant relationship between external debt (EXD) and GDP growth and positive and significant relationship is found between financial development (FD) and EXD in the long-run. Similarly, in the long-run, Debt servicing, trade openness and inflation have a significant and negative relationship with GDP growth While population growth and gross capital formation has significant and positive correlation with GDP growth.

Public Debt Sustainability in Nigeria

Public debt is a vital instrument for governments to fund public expenditure. This paper examined the public debt sustainability and economic growth in Nigeria using annual time series data from 1981 to 2021 and the generalized method of moments (GMM) technique. The variables used in the study include; Real GDP, external debt, domestic debt, debt servicing and government consumption. To capture the period the country was given debt relieve fund we used debt relief dummy. The effect of recession on the economy was captured using recession dummy. The empirical result showed that debt overhang exists with inverted U-shaped debt Laffer curve. The optimum public debt threshold range is 30% – 40% while the threshold benchmark is 36% for composite debt stock and 33% for external debt stock. Based on the findings, the paper recommends that Nigerian government should ensure optimal utilization of external debt to avoid crowding out of investments and also the existence of debt overhang.

The Threshold Effect of Domestic Public Borrowing on the Nigerian Economy

TLike many other developing countries, the Nigerian government has increased domestic borrowing recently. This study examines the nonlinear relationship between domestic borrowing and economic growth, covering 1980 and 2019. The study adopts the threshold regression approach to establish the switching point between domestic borrowing and economic growth in Nigeria. The results reveal that the domestic borrowing and economic growth threshold is 14.88% of GDP with an inverted U-shaped curve. The maximum turning point of the variables implies the application of the debt Laffer Curve in Nigeria, showing that domestic borrowing is favourable to the economy before the threshold. However, additional domestic borrowing after the threshold induces an adverse effect on the economy. Also, the regression results of the non-varying threshold measures show that while the effect of external debt has been positive and significant on economic growth, gross fixed capital formation and inflation were negative and significant. Therefore, while recommending more rigorous monitoring and efficient utilisation of domestic borrowed funds by the government, the study emphasises the application of the threshold of 14.88% of GDP on domestic borrowing in the country.

DEBT THRESHOLD AND ECONOMIC GROWTH IN INDONESIA: DEBT LAFFER CURVE ANALYSIS

Indonesia persistent episode of debt has been concerned by policymakers, researchers, and academicians. Due to continuous deficit experienced which create debt to carry out, issues on the fiscal policy of the imbalances in budget becomes important. The motivation of this study is due to the importance of knowing fiscal position since Indonesia has continuity budget deficit that accelerate high public debt. The increasing in public debt could affect decreasing fiscal space in development and could negatively affect economic growth. Debt has positive and negative effect on economic growth. Preventing negative effect of public debt on economic growth, so that the optimum debt should be identify to alert the fiscal position and can maintain economic growth. Using Debt Laffer Curve theory by using Fully Modified Least Square (FMOLS) found that the debt threshold in Indonesia is 33,55%. Since the empirical threshold is higher than current debt ratio, there is a tendency for government to increase debt until reach 33.55%. Moreover, policy maker needs to revise the existing debt threshold rule since the empirical and stated debt threshold is different.

Public debt, GDP and the Sovereign Debt Laffer curve: A country-specific analysis for the Euro Area

Public debt, GDP and the Sovereign Debt Laffer curve: A country-specific analysis for the Euro Area

The Threshold of External Debt Ratio in Indonesia

Since New Order1 regime, external debt has become one of the reliable capital sources in Indonesia. In 2017, the World Bank was incorporating Indonesia to the top ten middle-income country borrowers so it is necessary to analyze the effect of external debt ratio on economic growth. Using the debt Laffer curve theory, the authors determine the threshold of the external debt ratio. The method of analysis is quadratic regression. The research results indicate that there exists a non-linear relationship between the external debt ratio and economic growth in Indonesia. On the other hand, research results have found the threshold of external debt ratio in Indonesia is 48 per cent to Gross Domestic Product (GDP). The external debt ratio less than 48 per cent of GDP does not affect economic growth, but it will have a negative effect on economic growth when the ratio is more than 48 per cent of GDP. Keywords: external debt ratio, threshold, quadratic regression

DEBT LAFFER CURVE ANALYSIS: A CASE STUDY OF HEAVILY INDEBTED POOR COUNTRIES

This study explores that whether the debt financing or debt forgiving would be suitable for the Highly Indebted Poor Countries (HIPCs). Debt Laffer curve theory has been tested in 21 HIPCs by applying price equation of debt, maximized value of debt and price elasticity approach over the period of 1980 to 2014. The maximized value of debt criterion implies that Chad is not eligible for the debt write-off strategy in comparison with the rest of the countries. By applying price elasticity approach, it is observed that only Burkina Faso, Cameroon, Chad, and Republic of Congo are eligible for debt financing while the remaining countries should adopt debt write-off facility. The crux of the study is that overall debt forgiveness is suitable for the HIPCs. Moreover, it is also in the favor of both the creditor countries and various international financial institutions such as World Bank and IMF and HIPCs itself. The study suggests that the creditors should continue to be financing along with improving structural policies and institutions of the HIPCs

Short Term Effects of Households Debt Restructuring: Evidence from the French Experience

In some cases, debt relief might be efficient in decreasing household overindebtedness: it lowers the risk of re-default and ultimately leads to an increase in the expected value of the repayment. In other cases, it benefits households who would have been otherwise able to repay. In this paper, we assess whether French households are on the wrong side of the "debt Laffer curve" in the short term. When facing financial distress, households can file a case to a "households over-indebtedness commission" (HDC). The HDC can order an immediate repayment or grant a moratorium. We show that the cases are randomly allocated across case managers and that some case managers decide persistently more favorably towards households or creditors. Over a two-year horizon, a toucher manager on households leads to a 2 percentage points increase of the redefault rate but also to a 6 percentage point increase in the amount recovered by creditors at the agregate level. Our approach allows us identifying characteristics of the households related to lower return in asking a repayment. This provides case managers guidance for a more efficient bankruptcy process. JEL Codes: D1, G2, K35.

Determine the External Debt Threshold of the Southeast Asian Countries: Analysis Using Laffer Curve?

This paper research the relationship between external debt and economic growth. Using the debt Laffer curve theory, the authors determine the maximum debt level of the Southeast Asian countries. Secondary data period 2006–2014 of 10 countries of the Association of Southeast Asian Nations are collected from the Asian Development Bank and the International Monetary Fund website. The authors use the method of regression for balanced panel data with a fixed effect model. The research results indicate that there exists a nonlinear relationship between external debt and economic growth in the Southeast Asian countries, including five variables: budget balance to gross domestic product, the lag of gross domestic product growth, the ratio of total investment to gross domestic product, the ratio of external debt to gross domestic product and the ratio of debt payments on exports of goods and services. These five variables are significant statistics and explain the meaning 24.87 % of the model. The other two: trade openness and trade index are not statistically significant. On the other hand, the research results have found the maximum debt level of the Southeast Asian countries, which is 70.42 %. Based on the study results, the authors suggest some recommendations to help the government of the Southeast Asian countries to build up the maximum debt levels, in line with the socio-economic development goals of their countries in each period.

Relationship between Economic Growth and Debt: An Empirical Analysis for Sub-Saharan Africa

In this study, we examine the connection between economic growth and debt, with the question in mind -“Is debt a burden and bad for economic growth? Employing several sophisticated statistical approaches to investigate the problem and to assess the impact of debt on economic growth in 48 countries of Sub-Saharan Africa from 1995 to 2012, we find evidence of Granger causality between debt and economic growth in 8 out of the 48 sub-Saharan countries during the period of study and validate for the existence of “Debt Laffer Curve.” We also study the relationship between debt and economic growth rate in Granger causality and Dynamic Arellano-Bond panel data estimation frameworks, and find evidence of a negative correlation between the two variables (Debt and GDP) and confirm the findings by testing several versions of the models. Political decision and economic policy are intertwined and need to be examined carefully when implemented for economic growth and our findings lend credence to the politically unpopular austerity measures (constraints on government spending financed by borrowing). There is a limit to the economic growth rate that the government financed expenditure can bring. If the burden of debt is too high then there is a negative impact of debt on the economic growth. Keywords. Economic Growth, Debt, Laffer curve and Investments. JEL. E20, E60, E24.

BUDGET DEFICITS, EXTERNAL DEBT AND ECONOMIC GROWTH IN NIGERIA

The necessity for governments to borrow in order to finance deficit budgets has led to the development of external debt. This study examines how the use of budget deficits as an instrument of stabilization leads to the accumulation of external debt with the attending effects on growth in Nigeria between 1970 and 2003. By synthesizing a relationship between budget deficits and external debt the study shows the implications on economic growth of conducting a fiscal policy within the contexts of debt stabilization and debt sustainability. The results of the econometric analysis confirm the existence of the debt Laffer curve and the nonlinear effects of external debt on growth in Nigeria. The study concludes that if debt-financed budget deficits are operated in order to stabilize the debt ratio at the optimum sustainable level debt overhang problems would be avoided and the benefits of external borrowing would be maximized.

The Overhang Hangover

The authors revisit the debt overhang question. They first use nonparametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer Curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent) growth. On average, significantly negative coefficients appear when debt face value reaches 60 percent of GDP or 200 percent of exports, and when its present value reaches 40 percent of GDP or 140 percent of exports. Second, the authors depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, they ask whether, as the overhang level of debt is reached: (1) investment falls precipitously as it should when it becomes optimal to default; (2) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor; and (3) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to preempt default and exact punitive interest rates. The authors find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing or the burden of debt.

Financial sector inefficiencies and the debt Laffer curve

This paper analyses the implications of inefficient financial intermediation for debt management in a model where firms rely on bank credit to finance their working capital needs and lenders face state verification and contract enforcement costs. We show that lower expected productivity, higher enforcement and verification costs, or higher volatility of productivity shocks, may shift a country to the wrong side of its debt Laffer curve, with potentially sizable output and welfare losses. We also show that debt relief may bring few welfare benefits unless it is accompanied by reforms aimed at reducing financial sector inefficiencies. Copyright © 2005 John Wiley & Sons, Ltd.

Debt Laffer Curve for South Asian Countries

The inflow of foreign capital is generally seen as an accelerating force to economic growth, due to provision of additional resources, and these funds are considered complementary to local savings. It could also help to transfer technology and, therefore, increase productivity. Besides it enhances purchasing power of the recipients [Mullick (1988)] and as a result stimulates growth. The purpose of foreign debt is to increase real transfer of resources from the developed countries to the developing countries, so that these countries could pick up momentum of economic growth and as a result improve their welfare.1 The rapid increase in the external debt obligations of the developing countries, during the 1970s, had given rise to concerns about the dangers of increasing trend in interest and amortisation payments and, therefore, this situation posed a threat to debtor countries. The foreign debt of the developing countries has become a threat to their economic growth. The debt servicing of some of the LDC’s exceeded to their growth rates.2 Initially, most analysts believed that debt servicing problem would be temporary. It was hoped that creditworthiness and more normal growth of most of the countries would be restored with the influx of foreign resources. However, the debt crises have demonstrated that this assessment was optimistic and seemed never to be realised.3

Domestic Taxes and the External Debt Laffer Curve

This paper highlights the role of the domestic tax system in determining the economic consequences of an external debt overhang. The analysis indicates that fairly strong, and probably unrealistic, assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overhang are large enough to place a country on the wrong side of the debt Laffer curve. A simple taxation scheme is specified, and it is shown that a country can be on the ‘wrong side’ of its debt Laffer curve only if it is on the wrong side of its tax Laffer curve.

Debt relief schemes and welfare

This paper shows that concerted debt reduction may be welfare-improving even when the investment disincentive effect of a debt overhang is not large enough to place the debtor country on the wrong side of the debt Laffer curve. Whether the appropriate relief scheme involves debt reduction or new money, however, depends on whether investment disincentives or liquidity constraints dominate. It is shown that, except under very special circumstances, mixed policy packages involving both debt and liquidity relief may not yield the desired results. (JEL F34).

Distortionary Taxation and the Debt Laffer Curve

This paper highlights the importance of the role of the domestic tax system in determining the economic consequences of an external debt overhang. A simple taxation scheme is specified and it is shown that a country can be on the “wrong side” of its debt Laffer curve only if it is on the wrong side of its tax Laffer curve. The analysis indicates that fairly strong, and probably unrealistic, assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overhang are large enough to place a country on the wrong side of its debt Laffer curve.

Distortionary Taxation and the Debt Laffer Curve

This paper highlights the importance of the role of the domestic tax system in determining the economic consequences of an external debt overhang. A simple taxation scheme is specified and it is shown that a country can be on the “wrong side” of its debt Laffer curve only if it is on the wrong side of its tax Laffer curve. The analysis indicates that fairly strong, and probably unrealistic, assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overhang are large enough to place a country on the wrong side of its debt Laffer curve.

Sovereign Debt Relief Schemes and Welfare

This paper shows that concerted debt reduction may be welfare-improving even when the investment disincentive effect of a debt overhang is not large enough to place the debtor country on the wrong side of the debt Laffer curve. Whether the appropriate relief scheme involves debt reduction or new money, however, depends on whether investment disincentives or liquidity constraints dominate. It is shown that, except under very special circumstances, mixed policy packages involving both debt and liquidity relief may not yield the desired results.