Debt Rules Research Articles

Good Governance and Economic Growth in South European Countries

Economic growth is a prerequisite for economic development. However, there is no “recipe” for countries to create an environment of prosperity and to achieve high rates of economic growth. Many researchers have examined the drivers of economic growth and find that economic growth depends on many economic and institutional variables. In this context, the main objective of this paper is to examine the role of good governance on economic growth in piicgs countries (Portugal, Ireland, Italy, Cyprus, Greece, and Spain). The database was collected from many sources and the empirical analysis is based on a 2SLS (two-stage least squares) technique. In our empirical results, we find that trade openness, gross capital formation, inflation, political stability, rule of law, debt rule, budget balanced rule, and the combination between debt rule/budget balanced rule with political stability and combination between debt rule/budget balanced rule with rule of law are significant drivers of economic growth in piicgs countries while foreign direct investments, government effectiveness, voice and accountability, regulatory quality, fiscal rule index and expenditure rule are insignificant. However, the results may be different if we use other sample groups and/or different periods.

Public debt rule breaking by time-inconsistent voters

This study considers how present-biased preferences influence public debt policy when a violation of debt rules is possible. To address this issue, the study extends the framework of Bisin, Lizzeri, and Yariv (American Economic Review 105, (2015), 1711–1737) by allowing for rule breaking with extra costs; we show that rule breaking occurs when a country exhibits a strong present bias. We further extend the model by introducing a political process for determining the debt rule, and we show that a polarization of debt rules emerges between countries with high and low degrees of present bias.

Fiscal institutions: different classifications and their effectiveness

Fiscal institutions have been increasingly recognized as being useful for improving fiscal performance. These institutions are defined in different ways, but when a narrower definition is used, they correspond to independent fiscal institutions (IFIs), also called fiscal councils. In this paper, we employ three different classifications of fiscal institutions: from the European Commission, the International Monetary Fund, and one adapted from Calmfors and Wren-Lewis. Our main aim is to assess the impact of fiscal institutions on fiscal performance within a panel composed of the 28 countries of the European Union during the period of 1999–2016, using the bias-corrected least squares dummy variable dynamic panel estimator. We also explore the complementarity between fiscal institutions and the other elements of fiscal governance: numerical fiscal rules, medium-term budgetary frameworks, and the Stability and Growth Pact deficit and debt rules. The results confirm that fiscal institutions improve the discretionary implementation of fiscal policy: policy measures are less procyclical and more concerned with the sustainability of public debt. We also conclude that there is a complementary relationship between IFIs and the Stability and Growth Pact deficit rule, and that the performance of discretionary fiscal policy seems higher in countries with fiscal institutions than in countries with a predisposition for fiscal prudence.

Italy grapples with its public debt: A dog chasing its tail

ABSTRACTThe article reviews Italy’s fiscal policy over 2019-2020. Notwithstanding the fact that two different coalitions have been responsible for the budget law over the period and conducted two alternative fiscal strategies, they have both failed to tackle the public-debt problem. They have done so not only in practice with debt to GDP figures showing no significant progress, but also in the political narrative paying little attention to the need to reduce the debt burden weighing on future generations. Looking ahead, the repeated breach of EU debt rules poses a challenge that is both domestic and international, unless EU rules are significantly reformed.

Debt Rule Design in Theory and Practice: The SGP's Debt Benchmark Revisited

This paper is linked to two debates on fiscal policies: first, the implications of low interest-growth differentials for debt sustainability and, second, the reform of the EU fiscal governance framework. In both debates the choice of government debt anchor and the speed of adjustment take centre stage. The Stability and Growth Pact's debt rule appears predestined to fulfil the role of debt anchor. However, our analysis shows that its existing design gives rise to a pro-cyclical bias that has hampered its implementation in the low-growth low-inflation environment. We propose two parametric changes to better balance the objectives of macroeconomic stabilisation and debt sustainability: first, accounting for persistent deviations of inflation from the central bank's objective; and, second, a reduced speed of adjustment. Putting a reformed debt rule at the centre of the EU fiscal governance framework would allow reducing the latter's complexity without the need to revise the EU Treaties.

Do local governments use municipal companies for off-balance-sheet financing?

Abstract This paper investigates whether municipalities in Poland use their municipal companies to increase debt capacity beyond the limitations imposed by the fiscal debt rules. The article presents corporate governance and agency problems on the example of relations between local government units and affiliated companies. We review and link literature on corporate finance, in particular capital structure, and public finance - debt liabilities of municipalities. We analyse a sample of 2,019 observations of municipalities and their municipal companies using the Ordinary Least Squares (OLS) method, where explanatory variables were taken from the public and corporate finance (leverage and its determinants). Results show that long-term debt of municipalities is positively associated with the leverage and size of municipal companies, but it is negatively related to their profitability.

Germany’s Growth Prospects against the Backdrop of Demographic Change

AbstractThis paper shows how the German Council of Economic Experts (GCEE) determines Germany’s potential output, and compares the results with those of the European Commission. The approach of the European Commission is a natural benchmark, as it provides the basis for the deficit and debt rules of the European Union. In comparison with the European Commission’s method, the GCEE’s method places greater emphasis on demographic factors in estimating labour input. Additionally, both approaches differ regarding how they estimate the structural unemployment rate and total factor productivity. Finally, this paper discusses the limitations of, and the different options for estimating potential output.

Budżetowe procedury awaryjne w świetle Konstytucji RP oraz regulacji konstytucyjnych wybranych państw europejskich

The author raises the problem of optional procedures which are applied when a state budget act is not adopted. The article discusses the problem of the constitutional relations between the state budget and provisional budget as well as other optional procedures. Author compares the debt rule which is derived from the Constitution of the Republic of Poland with other similar regulations in other selected European legal orders. The article ends with a summary which contains postulates de lege ferenda.

Budżetowe procedury awaryjne w świetle Konstytucji RP oraz regulacji konstytucyjnych wybranych państw europejskich

The author raises the problem of optional procedures which are applied when a state budget act is not adopted. The article discusses the problem of the constitutional relations between the state budget and provisional budget as well as other optional procedures. Author compares the debt rule which is derived from the Constitution of the Republic of Poland with other similar regulations in other selected European legal orders. The article ends with a summary which contains postulates de lege ferenda.

Fiscal rules in a monetary economy: Implications for growth and welfare

AbstractThis study considers two fiscal rules, a debt rule that controls the debt‐to‐gross domestic product (GDP) ratio, and an expenditure rule that controls the expenditure‐to‐GDP ratio, in a monetary growth model with financial intermediation. Tightening of fiscal rules promotes economic growth and thus, benefits future generations. However, there could be two equilibria of the nominal interest rates, and the welfare effects of the rules on the current generation are different between the two equilibria. In particular, the effects of a decreased debt‐to‐GDP ratio depend on its initial ratio; a high (low)‐ratio country has no incentive (an incentive) to reduce the ratio further from the viewpoint of the current generation's welfare. This result provides an explanation for difficulties with fiscal reform in countries with already high debt‐to‐GDP ratios.

Eurozone Debt Crisis and Albania

Albania as part of the Western Balkans was affected by the consequences of the financial crisis in 2009 followed by the EU debt crisis. However, as a result of external factors, the slowdown in economic growth began to feel in 2008. Despite the fact that the economic growth in the country was the largest in the Western Balkans region and remained at positive levels even during the crisis, some of the economic and financial indicators had significant impact. Also, high increase in public spending in the infrastructure area was noticed, which accompanied the pre-crisis period and further deteriorated by its impact. Looking at these up rising data of the budget deficit and the public debt to cover the latter, IMF proposed two fiscal rules in order to contribute strengthening fiscal sustainability: 1- The debt rule, which directly allows the full functioning of automatic stabilizers and keeps government under control; 2- The expenditure rule aiming at debt brake, which allows a close connection between the operational goal and the fiscal sustainability objective (IMF Country Report No. 10/206: July 2010). Focus of this paper is particularly on the most important economic and financial indicators in Albania to better understand the extent of the impact of this crisis in the country and the measures taken as well. Through the comparisons of the situation before and after the crisis will be reached on the conclusions on the main instruments used by the government to cope with the crisis or avoid its consequences.

IRS: Social Welfare Organization Is Political Party Under Bad Debt Rules

IRS: Social Welfare Organization Is Political Party Under Bad Debt Rules

Local Government Public Debt Rules in the Visegrad Group Countries as Tools for the Optimization of Socio-Economic Development

The use of fiscal rules as an instrument of fiscal sustainability is manifested, most of all, by imposing the requirements as regards borrowing and the costs of public debt service, and most research is conducted in this context. In this article, the Authors ask a different question altogether: does the right selection of calibration factors for fiscal rules with respect to debt, as applied at Visegrad Group’s local government entities, have an impact on the fiscal discipline, on the one hand, and on the other, is it a factor contributing to sustainable socio-economic development of regions? A mixed method, one combining the results of qualitative and quantitative research, will be used to empirically verify the hypotheses related to the research problem presented.

Twin Deficits Revisited: A Role for Fiscal Institutions?

We revisit the twin deficit relationship for a sample of 193 countries over the period 1980-2016, using a panel fixed effect (within-group) estimator, bias-corrected least-squares dummy variable, system GMM, and common correlated effects pooled estimation procedures. The analysis accounts also for the existence of fiscal rules in place, their features, and their interaction with the budget balance. In the absence of fiscal rules, the twin deficit hypothesis is confirmed. The size of the estimated coefficient on the budget balance is between 0.68 and 0.79. However, the existence of fiscal rules strongly reduces the effect of budget balance on the current account balance (the coefficient is reduced to 0.1). In fact, the twin deficits relationship does not hold with some specific kinds of rules: debt rules, rules with monitoring of compliance, as well as budget balance rules and debt rules in emerging market economies and lowest income countries, and in the post-crisis period.

CAN THE CREDIBLE FISCAL POLICY MITIGATE THE TERMS OF TRADE FLUCTUATION?

This paper examines the links between fiscal policy and terms-of-trade movement in the case of Indonesia over the period 2001-13. Unlike other researchers, this paper explores both the rules-based and discretionary fiscal policies. The earlier factor covers deficit rule and debt rule which are intended to measure the fiscal policy credibility. The later follows Fatás and Mihov (2003; 2006). The OLS estimation of quarterly data reveals that the less credible deficit rule policy and discretionary fiscal policy have a positive impact on the terms of trade. In contrast, the more credible debt rule policy and government size tend to depreciate the terms of trade. Those findings suggest that fiscal policy credibility does not matter in the context of international market. Furthermore, to mitigate the external risks, the government intervention to the international market debt should be limited.

Privacy and Spouses in Louisiana: The Community Property Conundrum and Proposals for Reform

Since Warren and Brandeis first expounded on the right of privacy in 1890, individuals' legal ability to protect themselves from unreasonable intrusions upon their seclusion has grown through both jurisprudence and statutes. While privacy rights on a national level have developed, community property laws in Louisiana have not evolved to ensure similar protections for intra-spousal privacy rights. One reason Louisiana law has not progressed in this respect is because privacy rights create a conundrum for community property: how can spouses share property with one another as part of the community, yet still retain a right of privacy from one another in that property? Community property ownership, management, and debt rules cause consternation for Louisiana courts considering an individual spouse's right of privacy. Two Louisiana courts have held that community property rules trump a spouse's right of privacy. Thus, while intra-spousal privacy rights have developed on a national level, an individual spouse's privacy rights in Louisiana have remained stagnant. This Article seeks to provide guidance to the Louisiana legislature and courts as to how to amend current community property law so as to give spouses a reasonable right of privacy from one another in community property.

Fiscal policy and stock market returns volatility: the case of Indonesia

This paper separately studies the impact of different kind of fiscal policy on the stock return stabilisation in the case of Indonesia. Using quarterly data over the period 2001-2013, we obtained that the discretionary and automatic stabilisation fiscal policy tend to induce the stock returns volatility. While the credible debt rule policy leads to decrease the volatility of stock returns, the deficit rule policy is found to be non-credible and does not have any effect. Accordingly, the lower ratio of government expenditure to GDP along with improving commitment tightly to the planned deficit ratio is a good signal for stabilising financial market.

A Path to Balanced Budgets of Bund and Länder? The New Shape of the ‘Debt Brake’ and the ‘Stability Council’

ABSTRACTThis paper analyses the implementation of new debt rules and the function of the new Stabilitätsrat since its establishment in 2011. The new rules are explained and the effect of the new limit for public debt is examined. Furthermore, the composition, tasks and procedures of the Stabilitätsrat are described and evaluated. Finally, its activity is judged with individual examples. As a result, it is shown that for the new rules of Art. 109 para. 3, Art. 115 and Art. 143d GG to be successful, a normative commitment and corresponding political discipline not to incur new debts is required. The Stabilitätsrat alone is insufficient as an institutional framework to encourage budgetary discipline. Abolishing the Stabilitätsrat would be a first step in giving back control to politics in regard to debt and in dispelling the illusion that technocratic determination of the possibility to take new debt could end the debt problem.

Debt Policy Rules in an Open Economy

AbstractIn a small open economy model of endogenous growth with public capital accumulation, we examine the effects of a debt policy rule under which the government must reduce its debt–GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long‐run debt–GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).

How to Decrease the Amortization Bias: Experience vs. Rules

We conduct an experimental study that tests the effectiveness of de-biasing a certain form of exponential growth bias found in household finance debt decisions, called the amortization bias. We provide 251 bachelor students at a German university with a short tutorial based on one of three learning methods: experiential learning, learning a simple “I Owe More” debt rule-of-thumb, as well as learning an extended, but more accurate version of the “I Owe More” debt rule. Immediately after completing these tutorials, we retest for the amortization bias and find a significant bias improvement in all three treatments. More importantly, after confronting the same participants with similar debt scenarios approximately three weeks later, we find that those who had previously received a debt tutorial maintain a significantly larger bias improvement over the control group. However, during this short period, most of the individuals who learned the simple and complex rules-of-thumb could no longer apply the rule and reverted back to their biased answers, while the experiential learning group best retained their improvement in bias. We find evidence in this experiment that experience-based learning may be better suited to produce long-lasting improvements for attenuating the amortization bias.