Government Debt Research Articles

GOVERNMENT DEBT AND CRYPTOCURRENCIES: HOW BITCOIN IS CHANGING THE RULES OF THE GAME

In recent years, there has been a significant increase in public debt in many countries, which calls into question the sustainability of traditional financial systems. In this context, cryptocurrencies, especially bitcoin, are beginning to play an increasingly important role in the economy. This article explores the relationship between government debt and cryptocurrencies, focusing on how bitcoin can change the rules of the game in the financial world. We consider the mechanisms by which bitcoin and other cryptocurrencies can serve as an alternative to traditional financial instruments, as well as their potential as a means of protection against inflation and devaluation. In addition, the risks and benefits of investing in cryptocurrencies are analyzed against the background of growing government debt. The article also discusses the impact of regulation and government control on the development of the crypto market and its interaction with public finances. In conclusion, we hypothesize about the future role of bitcoin in the global economy and its ability to change the approach to public debt management.

Determinants of local government debt in the Federation of Bosnia and Herzegovina

Determinants of local government debt in the Federation of Bosnia and Herzegovina

Local government debt and corporate asset-debt maturity mismatches: Evidence from China

In the context of the rapid accumulation of public debt inducing tightened credit supply for firms in China, this paper empirically estimates the effects of local government debt on corporate financing and investment maturity decisions. We find that the increasing local government debt significantly intensifies corporate asset-debt maturity mismatches. Mechanism tests conducted from both the demand and supply side of credit resources indicate that local government debt will enhance corporate maturity mismatches by decreasing firms' availability to long-term credit and increasing the cost of debt financing. Heterogeneity analyses show that the positive relation between government debt and corporate asset-debt maturity mismatches is more pronounced in non-state-owned firms, firms with smaller sizes, higher growth rates, and higher R&D intensity. This study highlights the crucial role of public debt in shaping corporate financing maturity policy and provides important implications for government debt governance reform.

The Impact of Local Government Debt on Corporate Risk-taking

The Impact of Local Government Debt on Corporate Risk-taking

Local government debt, real estate credit, and systemic risk of commercial banks

ABSTRACT This study delves into the systematic tracking and monitoring of long-term equilibrium and short-term adjustments in systemic financial risk, a cornerstone for effectively implementing dual-pillar macro-prudential regulatory policies. Employing the ΔCoES indicator to gauge banking systemic risk, the paper harnesses cointegration analysis and the MS-VECM. It comprehensively examines the interactions between local government debt, real estate credit, and banking systemic risk from 2011 to 2022. The empirical findings reveal significant non-linear long-term equilibrium and short-term error correction relationships among these risks, predominantly characterized by marked dual-regime structural changes. These insights are highly relevant for consistently and coherently implementing macro-prudential regulatory policies across various economic cycles.

A Literature Review on the Causes and Spillover Effects of Local Government Debt Risk

A Literature Review on the Causes and Spillover Effects of Local Government Debt Risk

Bonds and Pensioning Scheme

The abstract provides an overview of national bonds and pension schemes. National bonds, issued by governments, offer investors a safe investment option with fixed or variable interest rates. They are used to finance government projects and are considered less risky than corporate bonds due to government backing. However, they carry risks such as interest rate and inflation risks. Pension schemes are essential for retirement planning, but their structure and benefits vary. Individuals should assess their options and supplement pensions with additional savings for a secure retirement. Key Words: Retirement planning, Pension schemes, Government debt.

Econometric Analysis of South Africa’s Fiscal and Monetary Policy Effects on Economic Growth from 1980 to 2022

This study examined South Africa’s economic growth rate from 1980 to 2022 through an econometric analysis of fiscal and monetary policies. The study sought to investigate the relationships between the economy’s growth rate and various fiscal and monetary policy variables, taking into account different economic approaches such as Keynesian, monetarist, and Wagner’s perspectives. The methodology used consisted of data preparation, multiple unit root tests, Autoregressive Distributed Lag (ARDL) cointegration analysis, diagnostic tests, and pairwise Granger causality analysis. The empirical analysis found a long-term cointegration among the economic growth rate, government debt, expenditure, and revenue in fiscal policy, though government debt and expenditure were not statistically significant. Contrary to economic theory, increased government revenue had a negative correlation with economic growth. There was no long-term relationship found between the economic growth rate and monetary policy variables such as the official exchange rate, inflation rate, real interest rates, and M3 money supply. Pairwise Granger causality tests revealed a one-way relationship between government spending and economic growth, providing support to the Keynesian approach to fiscal policy. This study also discovered evidence that economic growth Granger-causes inflation, implying that economic growth may have predictive power for inflation, consistent with the demand-pull inflation hypothesis. However, no direct predictive relationships were found between the selected monetary policy variables and economic growth, supporting the long-run theory of monetary neutrality. This study suggests evaluating spending, managing inflation, implementing reforms, closing infrastructure gaps, encouraging investment, and ensuring fiscal sustainability.

How Much Government Debt Is Now Acceptable for Russia?

The period of near-zero interest rates is over, and the recent noticeable growth in the debt burden, as well as in the cost of interest payments to service that debt, has made it more challenging for national and global financial regulators to strike a balance between keeping budgetary parameters stable and spurring economic development. This article proposes a “safe” threshold for the debt burden such that the ac-cumulated debt would not diminish prospects for growth and degrade fiscal sustainability. A significant negative linear effect of government debt on GDP growth rates from 1980 to 2021 has been observed for a total sample of 57 countries. According to the Hansen test, there are relatively safe thresholds for high- and middle-income countries at 56% and 24% of GDP, respectively. An assessment of the impact of government debt on the dynamics of interest expense indicates that there is a stable positive relationship between them. The conclusion drawn is that the thresholds beyond which an acceleration in the growth of interest payments would produce an increase in the debt burden stand at 51% and 29% of GDP, respectively, for the same groups of countries. However, the current conditions of unprecedented sanctions that restrict access to foreign borrowing together with a double-digit key interest rate were not taken into account for calculations based on the retrospective data. When those factors are included, the authors’ projections indicate that Russia’s safe level of debt should not exceed 20% of GDP.

Government debt and economic growth: heterogeneity, asymmetries, and the role of net debt

ABSTRACT Using data on 167 countries over 1970–2019, this study gathers new evidence about the government debt-growth relationship. We jointly address several features of the panel – foremost asymmetry, cointegration, endogeneity, country heterogeneity and cross-sectional dependence. We find that increases in per-worker debt are detrimental to the long-run dynamics of output, but our nonlinear estimates suggest that changes in government debt propagate their effects through different channels. Applying alternatively gross and net public debt as a measure of indebtedness yields different results too, as happens with the adoption of different estimators. The magnitude of the effects depends on the model specification, indicating that cross-country estimates of the debt-growth nexus require parsimonious interpretations.

Developing environmental sustainability policy – How financing and subsidies are influencing green innovation in mineral extraction industries in China

Mineral extraction is regarded as a pollution-intensive industry and is confronted with multiple environmental sustainability challenges. This issue poses an existential crisis for mineral extraction due to continued global pressure to adopt more sustainable practices in their functioning. Despite its importance, there is a notable gap in the literature regarding how these companies encounter financial challenges, particularly in the context of high-risk, long development cycles, and the unique double externalities associated with green innovation. This research, leveraging panel data from 2016 to 2023, aims to fill this gap by examining whether Chinese mineral extraction companies demonstrate distinct preferences for specific financing sources and by evaluating the role of government in facilitating their green innovation activities. Our findings indicate that such companies utilize a mix of internal and external financing to support their green innovation projects. It is observed that the influence of external finances channels, namely government subsidies, equity financing and debt financing, on green innovation progressively weakens, a conclusion supported by multiple robustness checks. Furthermore, the study highlights the crucial role of government subsidies in motivating publicly listed companies to enhance their green innovation activities through debt and equity financing, thereby contributing to a more equitable and sustainable development paradigm in the Global South.

Mixed deterministic and stochastic disturbances in a discrete-time Nash game

This paper considers a discrete-time non-cooperative M-players linear affine quadratic game of pre-specified fixed duration, affected by stochastic noise and deterministic disturbances. The last one is seen as a pernicious fictitious player looking to maximise the expected cost functions of each player. Inspired in the discrete-time robust dynamic programming, sufficient conditions for the existence of a type of robust feedback NE are given in the solution of a set of discrete-time difference equations. A formal induction proof is provided for the closed form of the obtained robust set of strategies. Two illustrative simulation examples are included, one related to the problem of coordination of a two-echelon supply chain with uncertain seasonal demand. The goal of the agents is to reduce the expected cost of storage while satisfying a partially known demand. The second example is related to a game of government debt stabilisation. Comparing the simulation with the standard Nash strategy, the robust one achieves a better performance.

Determinants and international transmission of interest rates: Do foreign reserves and sovereign debt matter?

AbstractWe analyze the role of international reserves and sovereign debt in the determination and international transmission of interest rates. We develop a model that describes the money market equilibrium with capital account openness. It predicts that higher levels of international reserves lead to lower interest rates whereas the effect of higher government debt is ambiguous. We then test empirically these predictions on a panel of 128 countries over 1985–2019. We find that: (i) the transmission of U.S. interest rates to domestic interest rates is stronger in emerging market economies (EMEs) than in advanced economies (AEs) for short‐term interest rates (STIR), and vice versa for long‐term interest rates (LTIR); (ii) international reserves help counteract the transmission of the U.S. policy rate on STIR in EMEs; (iii) a higher sovereign debt level is associated with lower interest rates in EMEs (liquidity effect), but higher interest rates in developing economies (risk premium effect).

Public Debt Economic Growth Nexus: How Effective to Allay Resetting Economic Growth of India

There are two primary schools of thought in contemporary debates on the causes of India's debt crisis: those linked to changes in the world economy and those connected to errors in domestic policy. Because of the instability of the world economy, developing countries like India are forced to borrow money from national and international institutions to make up the difference in their spending. For these capital-poor economies to improve their capital stock and stable levels of per capita output, borrowing is considered essential. According to conventional economic theory, public debt can temporarily increase economic development by promoting aggregate demand. Nonetheless, the majority of empirical research conducted in many nations shows that public debt and long-term economic growth are negatively correlated. Theoretically, it is still unclear how much public debt has contributed to India's economic expansion. The purpose of this study was to investigate how public debt affected India's economic growth from 1991 and 2022. The study looked at the connection between India's economic expansion and public debt. The report suggests that borrowed money be used to diversify the productive capacities of the economy and advises cautious management of governmental debts. This would produce sufficient resources to settle the obligations without having a negative impact on the economy.

Divergent credit risk responses to local government debt among Chinese banks: a stress test analysis

ABSTRACT This study explores the heterogeneous impact of local government debt on credit risk across ‎state-owned and urban and rural commercial banks in China, through the analysis of stress test ‎methodology and quarter-based data in the period 2014–2021. It found that if the scale ‎of local government debt expands, the Non-Performing Loan (NPL) rates will reduce in state-owned commercial banks, ‎while the rural and urban commercial banks will increase. In the case of further decay in the scale of local government debt and macroeconomic indicators, there would be more credit risk in a heterogeneous manner among different-sized commercial banks. Medium-sized urban commercial banks have the smallest rise in non-performing loan rates due to the higher individual and corporate credit risks they face. Moreover, the study finds the resiliency of the risks weak and poor preparation for loan impairment in covering the potential loan losses in a pressured scenario compared to their counterpart urban and state-owned rural commercial banks. The findings suggest that rural commercial banks need to improve their risk ‎resilience to cope with extreme shocks.

The impact of digital tax administration on local government debt: Based on the revision of the tax collection and administration law

Digital transformation of tax administration, a crucial source of government fiscal revenue, enhances tax collection efficiency and compliance, reduces tax evasion, and increases fiscal revenue, thereby providing more stable funding sources for local governments. This study examines the relationship between digital tax administration and local government debt, using data from Chinese prefecture-level cities from 2009 to 2021. The findings indicate that digital tax administration significantly reduces the level of local government debt. Furthermore, heterogeneity analysis reveals that the impact is more pronounced in the eastern regions and areas with higher levels of informatization. This study aims to provide new perspectives and approaches for the digitalization of tax administration and local government debt management, thereby promoting the modernization of tax governance and the healthy development of local finances.

China’s GDP-at-Risk: Real-Time Monitoring, Risk Tracing, and Macroeconomic Policy Effects

Timely monitoring GDP-at-risk and tracing economic downside risk sources can help establish effective risk warning and prevention systems. This study constructs a probability distribution for China’s economic growth with skewness determined by a multidimensional predictor information set of macro fundamentals. Such a treatment allows us to identify changing drivers of economic downside risks during monitoring GDP-at-risk’s dynamic evolutionary path. We also employ a time-varying parameter vector autoregression model with random volatility to explore the heterogeneous impacts of different macroeconomic policy instruments on economic slowdowns. Our results provide empirical support for macroeconomic management and policy formulation in emerging markets. We reach three conclusions. First, the dynamics of GDP-at-risk exhibit significant event-driven characteristics, and economic downside risk increases significantly under the influence of extreme events. Moreover, the probability distribution of economic growth is asymmetric--as the downside risk of the economy increases, its upside potential increases disproportionately. Second, the time-varying risk trace of GDP-at-risk shows that the contribution of financial conditions and local government debt to economic downside risk declines. The importance of the risk-driving role of housing price growth gradually increases, suggesting that China’s property prices can provide more valuable early warning information about future growth risk, allowing time for precise preventive measures. Nevertheless, interest rates and inflation as risk divers have consistently minimal impacts. Third, the heterogeneity impulse response function of GDP-at-risk suggests that quantity-based monetary policy and fiscal policy can manage economic downside risks in the short run. In contrast, price-based monetary policy can curb economic overheating and reduce downside risks in the medium to long term. Therefore, the effect of price-based monetary policy is more sustainable in China.

The economic and fiscal transition costs of global climate mitigation in fossil fuel export dependent economies

Global decarbonization has large implications for trade and financial flows, and with few economies likely to be more affected than those relying heavily on exporting fossil fuels. This study first identifies 40 highly fossil fuel dependent economies and then, through several empirical strategies, examines the potential implications for oil rents, public finances and economic growth from global decarbonization. First, it is estimated that as a group, countries would lose more than 60 percent of oil rents alone, or between (present value adjusted) US$12–14 trillion, for the period 2023–2040 under a global ‘net-zero 2050’ versus a ‘business as usual’ scenario, - a loss equivalent in size to between 120 and 142 percent of GDP. Second, local projections model estimates suggest that there are large and persistent adverse growth and fiscal impacts associated with global decarbonization in emerging market and developing economy oil exporters. Here, a 10 percentage point (pp) decrease in (real) oil price inflation is associated with a decline of 1.58 percent in (real) GDP four periods after the shock; a decrease in annual government revenue (as a percentage of GDP) by between 0.6 and 0.8 pp and; an addition of about 0.5 pp to government debt per year. Finally, the study discusses relative vulnerabilities, and the domestic and international policy options needed to mitigate transition cost. Aside from a handful of primarily high-income countries, most countries have little or no savings to help them cushion an inevitable steep fall in demand for their main export and source of revenue, and more than one third of countries are characterized by either low or medium levels of human development. Whereas several countries are relatively well positioned to successfully mitigate the transition cost provided urgently prioritized domestic reforms, a substantial subgroup of countries will need international assistance to avoid potentially large negative socio-economic consequences.

China's local government debt and firm tax burden

We establish a relationship between China's local government debt (LGD) and the tax burden on firms. Using datasets of LGD and listed firms from 2009 to 2021, we find that LGD significantly reduces firm tax burden. The tax reduction effect of LGD is particularly pronounced in regions with business-friendly environments and lower fiscal pressure, and is more evident among state-owned enterprises (SOEs) and less-profitable firms. We also find that new government bonds demonstrate a stronger effect on reducing firm tax burden than refinancing bonds do. The strategic growth of LGD can be meaningfully applied to stimulate firm and regional growth.

People’s understanding of inflation

This paper studies people’s understanding of inflation—their perceived causes, consequences, trade-offs-and the policies supported to mitigate its effects. We design a new, detailed online survey based on the rich existing literature in economics with two experimental components — a conjoint experiment and an information experiment — to examine how well public views align with established economic theories. Our key findings show that the major perceived causes of inflation include government actions, such as increased foreign aid and war-related expenditures, alongside rises in production costs attributed to recent events like the COVID-19 pandemic, oil price fluctuations, and supply chain disruptions. Respondents anticipate many negative consequences of inflation but the most noted one is the increased complexity and difficulty in household decision-making. Partisan differences emerge distinctly, with Republicans more likely to attribute inflation to government policies and foresee broader negative outcomes, whereas Democrats anticipate greater inequality effects. Inflation is perceived as an unambiguously negative phenomenon without any potential positive economic correlates. Notably, there is a widespread belief that managing inflation can be achieved without significant trade-offs, such as reducing economic activity or increasing unemployment. These perceptions are hard to move experimentally. In terms of policy responses, there is resistance to monetary tightening, consistent with the perceived absence of trade-offs and the belief that it is unnecessary to reduce economic activity to fight inflation. The widespread misconception that inflation rises following increases in interest rates even leads to support for rate cuts to reduce inflation. There is a clear preference for policies that are perceived to have other benefits, such as reducing government debt in progressive ways or increasing corporate taxes, and for support for vulnerable households, despite potential inflationary effects.