Debt Limits Research Articles

Covid‐19, Economic Growth and South African Fiscal Policy

AbstractFollowing years of fast‐rising debt levels, we show that the Covid‐19 crisis worsened an already deteriorating fiscal position in South Africa. To restore fiscal sustainability in the aftermath of the crisis some commentators argue that higher government expenditure will grow GDP sufficiently to stabilise the debt/GDP ratio. We reject this, showing that although a real increase in expenditure stimulates economic growth (a short‐run, once‐off effect), the public expenditure/GDP ratio exceeds the level at which an increase in the ratio positively impacts growth. We then explore the past efforts of government to maintain or restore fiscal sustainability by estimating a fiscal reaction function using a Markov‐switching model. Following the impact of the Covid‐19 crisis on the budget, we subsequently establish the deficit, expenditure and revenue adjustments that the government will have to make to restore fiscal sustainability. Finally, we consider the merits of introducing a debt ceiling.

Natural Disasters, Climate Change, and Sovereign Risk

<ns2:p>I investigate how natural disasters can exacerbate fiscal vulnerabilities and trigger sovereign defaults. I extend a standard sovereign default model to include disaster risk and calibrate it to a sample of seven Caribbean countries that are frequently hit by hurricanes. I find that disaster risk reduces government's ability to issue debt and that climate change further restricts government's access to financial markets. Next, I show that "disaster clauses", that provide debt-servicing relief, allow governments to borrow more and preserve government's access to financial markets, amid rising risk of disasters. Yet, debt limits may need to be adopted to avoid overborrowing and a decline of welfare.</ns2:p>

MONEY AND CREDIT REMIX

Money and credit are ubiquitous in actual economies, but there is an active theoretical debate on whether they are both necessary if they can both be used in all transactions. Recently, Gu et al. (2016) have shown that money and credit cannot be simultaneously essential and debt limits do not matter for the determination of real allocations in a class of monetary economies. In this paper, we revisit their irrelevance result in a monetary economy based on Lagos and Wright (2005), which exhibits a misallocation of liquidity that is common in search models of money. We show that monetary loans, which naturally require the use of both money and credit, implement Pareto superior allocations in which the size of debt limits matters.

Financial imperatives for local budgeting

Subject. In the study, I evaluate how financial imperatives and restrictions influence the formation and use of the local budget. Objectives. The study analyzes causes of the deficit of the local budget, municipal debt and debt servicing expenses and review them for current limits set by the budgetary laws. Methods. I analyzed scholarly data and other information and conducted the synthesis of the findings. Results. To ensure that the local budget is compliant with lawful financial imperatives that govern budgetary planning and local forecasts. I suggest how the profitable part of the local budget should be backed and expenditures should be optimized. Conclusions and Relevance. Income and expenditures of the local budget are regulated with financial imperatives set by the Budget Code of the Russian Federation, such as the balance of income and expenditures, limit of the deficit, limit of the municipal debt, the upper limit of municipal debt servicing expenditures. To ensure the compliance and increase the profitable part of the local budget, municipal authorities should more actively support investment projects and SME, update the information about the taxable base and holders of real estate for purposes of non-taxable income growth, handle overdue payments and underpaid taxes and property payments more intensively. To optimize expenditures of the local budget, it would be reasonable to replace the region’s debt liabilities to credit institutions with cheaper publicly-funded loan from the higher-level budgets, and refinance the current debt liabilities to credit institutions as the Central Bank of the Russian Federation decreases the key rate.

DP 0250 - Fiscal Fatigue and Public Debt Limit in Brazil: are we on sustainable path?

In this paper I use Ghosh et al. (2013) approach to assess Brazil’s fiscal sustainability, fiscal fatigue, and public debt limit. Using monthly data for the last 21 years, I estimate Brazil’s fiscal reaction function and an eventual fiscal fatigue effect, which is a lack of government’s will (or capability) to implement higher primary surpluses as a reaction to higher levels of debt. I show that fiscal fatigue occurs at relatively mild levels of debt in Brazil. I also define Brazil’s debt limit, which is the precise level of debt/GDP ratio above which the debt dynamics becomes explosive, public debt becomes unpayable, and the government invariably defaults. I show that the debt limit in Brazil is much lower than the limits that have been estimated for advanced economies.

Prime Time to Re-examine Prime Money Market Funds: Floating NAVs and Liquidity Risk During Economic Crises

This paper offers a first look at a recent innovation, namely, mutual funds offering intraday share redemptions. This novel design feature emerged following the adoption of floating net asset values by prime institutional money market funds in October 2016. Consistent with a theoretical model, we find that funds offering multiple intraday NAVs and redemption windows maintain higher liquidity buffers but are exposed to significantly larger outflows during periods of stress, compared to funds offering end-of-day NAVs/redemptions. Our analysis covers (1) the COVID-19 shock of March 2020, and (2) the near-default of U.S. debt during the debt ceiling crisis of 2018.

MONETARY POLICY, FINANCIAL CONSTRAINTS, AND REDISTRIBUTION

AbstractThis article examines how financial constraints affect redistribution via monetary policy. We explore a novel mechanism of monetary nonneutrality, which is based on debt limits imposed in nominal terms. Specifically, when debt is constrained by current income, monetary policy can alter the real terms of borrowing. Changes in inflation exert ambiguous effects, depending on the initial debt/wealth position and the willingness to borrow. We show analytically that borrowers can benefit from increased debt limits under lower inflation rates. This novel effect can dominate conventional debt deflation effects. We find that particularly less indebted borrowers as well as potential future borrowers gain and that aggregate welfare can be enhanced under a permanent reduction in inflation.

Regulating Money: How Did Shadow Banks Respond to a $1 Trillion Shock

During a flight to liquidity, investors demand large amounts of government-backed safe assets in a rush. The sluggish reaction of the public supply of safe assets opens up a role for government-sponsored shadow banks. We exploit exogenous changes in both demand and supply of safe assets from the 2014 money fund reform and the 2015 debt limit. We find that shadow banks act as a substitute as well as a complement to public supply during a flight to liquidity. Our findings carry over to the dash for cash at the onset of the Covid-19 pandemic

Democracy in Lockdown

Democracy in Lockdown Kriszta Kovács (bio) on march 23, 1933, an act was adopted in nazi germany, in response to the "crisis" of the Reichstag building fire, to enable Hitler to issue decrees independently of the Reichstag (parliament) and the presidency. Article 48 of the constitution of the Weimar Republic made this act possible. Eighty-seven years later, on March 23, 2020, the Hungarian parliament debated a piece of legislation so similarly sweeping that Hungarians now informally call it the "Enabling Act." Seizing as a pretext the threat to public health caused by the spread of COVID-19, government members tabled a draft act on protecting against the coronavirus in accord with articles 48–54 of the Hungarian constitution. The act enables the government led by Prime Minister Viktor Orbán to issue decrees independently of the parliament. EMERGENCY POWERS UNDER THE HUNGARIAN CONSTITUTION This similarity might be only a strange coincidence, but it is not the first time that Prime Minister Orbán has jumped on a crisis to increase his power. Since returning to office in 2010 (he had led the Hungarian government previously, from 1998 to 2002), Orbán has used countless "crises" to consolidate his hold on power (Kovács 2016). For example, in 2011, a parliamentary supermajority justified the adoption of a new constitution with reference to the consequences of the 2008 global financial crisis and the country's high level of public debt. The ruling majority gave its crisis management policy a constitutional rank: the 2011 constitution contains a debt ceiling, and it deprives the Constitutional Court of its power to review financial laws. These measures remain in effect. [End Page 257] The 2011 constitution, sometimes called Hungary's "crisis management constitution," contains a detailed set of prescriptions for the state authorities to respond to emergencies. Articles 48–54 provide for special emergency powers in case of an imminent danger of war or external armed attack and in the event of a natural or industrial disaster. It contains an exhaustive list of situations in which the country could be deemed to be under threat, and it does not provide for the suspension of constitutional rights under any other circumstances. Several years later, faced with a sharp rise in the number of asylum-seekers arriving in Hungary, Orbán saw another opportunity to expand his power. Since mass migration was not among the constitutionally listed situations that might justify the introduction of emergency rule, Orbán's government in 2016 instead used article 15(1) of the constitution—"The Government shall exercise powers which are not expressly conferred by laws on another state body"—to declare "a nationwide state of crisis due to mass migration" (decree 41/2016). Today, even though the border with Serbia is hermetically sealed and not a single migrant can enter Hungary's territory (Inotai 2020), the "state of crisis due to mass migration" is still in effect because the government has renewed it every six months, most recently on March 5, 2020. DECREE ON THE PANDEMIC EMERGENCY Six days later, on March 11, 2020, once again citing article 15(1) of the constitution, Orbán's government declared a "state of danger because of the pandemic." (Decree 40/2020 also cited the state of danger clause in article 53 even though this article does not mention a pandemic as a source of danger.) The decree on the pandemic emergency included an automatic sunset after 15 days without parliamentary authorization. With that deadline looming, Orbán's government introduced the new Act on Protecting against the Coronavirus (Hungarian Spectrum 2020). Officials [End Page 258] argued that without the decree on the pandemic emergency, the government would not be able to properly respond to the crisis, and they pressed the parliament to act as quickly as possible. The democratic parliamentary opposition was unified in rejecting the expedited procedure, so the decree expired on March 26. In the meantime, between March 26 and March 30, the government (decree 71/2020) and the head of the National Public Health Center (decision of March 26) issued new orders on restriction of movement. In the process, the government itself demonstrated that it could issue the...

UNSECURED CREDIT, PRODUCT VARIETY, AND UNEMPLOYMENT DYNAMICS

Revolving credit is the prime determinant of short-run household liquidity and comoves positively with product variety and negatively with unemployment. I develop a theory of feedback between revolving credit and product development and examine its ability to explain labor market volatility. Extending the Mortensen–Pissarides model with an endogenous borrowing constraint and free entry of monopolistically competitive firms reproduces stylized facts in the data and amplifies both productivity and financial shocks through mutual causality. Higher debt limits encourage firm entry and raise product variety (the entry channel), and greater variety makes default more costly and thereby raises the equilibrium debt level (the consumption value channel). Though productivity shocks are sufficient to generate higher volatility, financial shocks are essential in approximating the time series patterns of unemployment, vacancies, and revolving credit in the data, and reproduce the rise in unemployment during the Great Recession.

Borrowing By Any Other Name: Why Presidential 'Spending Cuts' Would Still Exceed the Debt Ceiling

On three occasions since mid-2011, the United States has come perilously close to exhausting its borrowing authority under a statutory limit commonly called the "debt ceiling." In prior work, the current authors argued that, in the event that the debt ceiling is reached, the President will face a "trilemma" in which any realistic action he takes — defaulting on government obligations, raising taxes, or issuing debt in excess of the statutory ceiling — would unconstitutionally usurp legislative power. We argued that in such circumstances, violating the debt ceiling would be the "least unconstitutional option." Nonetheless, most pundits and politicians, including the President, appear to assume that if the debt ceiling is reached, default would be necessary. Here, we observe a previously unnoticed deficiency in this assumption: Default would not only usurp congressional power to set spending levels; it would not even satisfy the debt ceiling, because failure to pay money due government obligees is a kind of borrowing, both for statutory and constitutional purposes. A "loan" taken from the lender involuntarily is hardly better than consensual borrowing. The government could avoid this result only by expressly repudiating its obligations, but to do that would violate even the very narrow construction of Section 4 of the Fourteenth Amendment advanced by those who treat default as the necessary consequence of congressional failure to raise the debt ceiling.

When is Debt Odious? A Theory of Repression and Growth Traps

How is a developing country affected by its government’s ability to borrow in international markets? We examine the dynamics of a country’s growth, consumption, and sovereign debt, assuming that the government’s objective is to maximize short-term, typically wasteful, expenditures. Sovereign debt can extend the government’s effective horizon; the government’s ability to borrow hinges on its convincing investors they will be repaid, which gives it a stake in the future. The lengthening of the government’s effective horizon can incentivize it to adopt policies that result in higher steady-state household consumption than if it could not borrow. However, access to borrowing does not always improve government behavior. In a developing country that saves little, the government may engage in repressive policies to enhance its debt capacity, which only ensures that successor governments repress as well. This leads to a “growth trap” where household steady-state consumption is lower than if the government had no access to debt. We argue that such a model can explain the well-known negative correlation between a developing economy’s reliance on external financing and its economic growth. We also analyze the effects of instruments such as debt relief, a debt ceiling, and fiscal transfers in helping a developing economy emerge out of a growth trap, even when governed by a myopic, possibly rapacious, government.

Administering Money: Coinage, Debt Crises, and the Future of Fiscal Policy

The power to coin money is a fundamental constitutional power and central element of fiscal policymaking, along with spending, taxing, and borrowing. However, it remains neglected in constitutional and administrative law, despite the fact that money creation has been central to the United States’ fiscal capacities and constraints since at least 1973, when it abandoned convertibility of the dollar into gold. This neglect is particularly prevalent in the context of debt ceiling crises, which emerge when Congress fails to grant the executive sufficient borrowing authority to finance spending in excess of taxes. In such instances, prominent legal and economic scholars have argued that the President should choose the “least unconstitutional option” of breaching the debt ceiling, rather than impeding on Congress’s even more fundamental powers to tax and spend. However, this view fails to consider a fourth, arguably more constitutional option: minting a high value coin under an obscure provision of the Coinage Act, and using the proceeds to circumvent the debt ceiling entirely. Reintroducing coinage into our fiscal discourse raises novel and interesting questions about the broader nature of, and relationship between “money” and “debt.” It also underscores how legal debates over fiscal policy implicate broader social myths about money. As we enter the era of digital currency, creative legal solutions like high value coinage have the potential to serve as imaginative catalysts that enable us to collectively develop new monetary myths that better fit our modern context and needs.

Welfare gains of bailouts in a sovereign default model

We examine the welfare effects of bailouts in economies exposed to sovereign default risk. When a government of a small open economy requests a bailout from an international financial institution, it receives a non-defaultable loan of size G that comes with imposed debt limits. The government endogenously asks for the bailout during recessions and repays it when the economy recovers. Hence, the bailout acts as an imperfect state contingent asset that makes the economy better off. The bailout duration is endogenous and increases with its size. The bailout size creates non-trivial tradeoffs between receiving a larger amount of relatively cheap resources precisely in times of need on the one hand, and facing longer-lasting financial constraints and accumulated interest payments, on the other hand. We characterize and quantify these tradeoffs and document that welfare gains of bailouts are hump-shaped in the size of bailout loans.

The Political Economy of Debt and Entitlements

Abstract This article presents a dynamic political-economic model of total government obligations. Its focus is on the interplay between debt and entitlements. In our model, both are tools by which temporarily powerful groups can extract resources from groups that will be powerful in the future: debt transfers resources across periods; entitlements directly target the future allocation of resources. We prove the following results. First, the presence of endogenous entitlements dampens the incentives of politically powerful groups to accumulate debt, but it leads to an increase in total government obligations. Second, fiscal rules can have perverse effects: if entitlements are unconstrained, and there are capital market frictions, debt limits lead to an increase in total government obligations and to worse outcomes for all groups. Analogous results hold for entitlement limits. Third, our model sheds some lights on the influence of capital market frictions on the incentives of governments to adopt fiscal rules, and implement entitlement programs. Finally, we identify preference polarization as a possible explanation for the joint growth of debt and entitlements.

Debt limits and fiscal space for some Latin American economies

Abstract This paper provides evidence on the debt limits and fiscal space for some Latin American emerging economies under the fiscal fatigue approach (Ghosh et al., 2013). We propose the spline technique to estimate each government's reaction function and the sovereign risk premium endogenous to the country's indebtedness. Estimates were made with an unbalanced panel of 13 economies—six from Latin America—for the period 1980–2018. The results vary importantly across the countries. They suggest, for instance, that the Colombian public debt limit would be close to 68% of GDP and that the fiscal space—the gap between the current debt level and the estimated debt limit—would reach 16 percentage points. Among the other Latin American economies, Peru and Chile have the largest fiscal space (50% and 39%, respectively), while Ecuador has the lowest (13%). The findings for Mexico look like those of Colombia.

Government Debt Limits and Stabilization Policy

We evaluate alternative public debt management policies in light of constraints imposed by the effective lower bound on interest rates. Replacing the current limit on gross debt issued by the fiscal authority with a limit on consolidated debt of the government can ensure that output always reaches its potential, but it may permit excess government spending when the economy is away from the effective lower bound. The welfare-maximizing policy sets the gross debt limit to the level implied by Samuelson (1954), while the central bank finances government spending with money when the economy is at the effective lower bound.

Limitation of public debt on the verge of financial crisis

The foretaste of the financial crisis raises the question of the functioning, application and enforcement of measures to ensure sound and sustainable public finances. The limitation of public debt was enshrined in law in the Czech legal system in 2017, and in April of this year one of the established fiscal rules was amended. The aim of this article is to critically analyze the adjustment of the public debt limitation that has been undertaken in the context of the current crisis caused by the spread of COVID-19. The introduction of the article will describe the European and Czech context of the limitation of public debt and setting budgetary responsibility. Subsequently, the article briefly summarizes the effects of the coronavirus crisis on the implementation of the state budget and, consequently, the justification for the legislative change of the set fiscal rule. The methods used in the article are mainly the method of literary research relevant sources, the method of description of the limitation of the public debt regulation in European union and in passages describing the current state of budgetary responsibility rules. Method of evaluation appears in the parts of the work evaluating the legislative adjustments to budgetary responsibility rules due to the coronavirus crises.

Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses

Treasury securities normally possess unparalleled safety and liquidity and, consequently, carry a money premium. We use recent debt limit impasses, which temporarily increased the riskiness of Treasuries, to investigate the relationship between the money premium, safety, and liquidity. Our results shed light on Treasury market dynamics specifically, and debt more generally. We first establish that a decline in the perceived safety of Treasuries erodes the money premium at all times. Meanwhile, changes in liquidity only affected the money premium during the impasses. Next, we show that Treasury safety and liquidity dynamics are generally consistent with the theory of the information sensitivity of debt.

Sustainable energy development issues in the context of world economy deglobalization

The need for sustainable development of regional economies and the energy sector in the context of world economy deglobalization is highlighted. The role of energy companies as the key economic entities in providing the resilient development of regional socio-economic systems is substantiated. A number of Russian energy companies are correlated to the regions within the federal districts. Based on the review of the sustainable development concept, the gaps in the theory of regional economic resilience and in the methodology of qualitative evaluation ofthe energy sector’s participation are stated. A comprehensive approach combining the debt limitation methodology with the conceptual model by C. Walsh is suggested for the estimation of sustainable development in the energy sector. The application of the approach using the example of Russian energy companies revealed the key factors of imbalance in operating and investment efficiency management.