Debt Shocks Research Articles

Debt shocks and the dynamics of output and inflation in emerging economies

This paper empirically examines the impact of public debt shocks on output and inflation in 34 emerging market economies (EMEs), using panel local projections over the period 2000 to 2022. The estimated results show that real GDP falls significantly after an unanticipated increase in public debt while inflation rises. We also examine whether fundamental characteristics across EMEs could affect the impact of public debt shocks. The results also suggest nonlinearities in the dynamics, where higher initial debt levels, tighter domestic financial conditions, and lower income levels amplify the negative responses of real GDP, while tighter global financial conditions dampen the negative impacts of debt shocks. For inflation, the responses vary depending on economic-specific characteristics.

Public debt shocks and macroeconomic stabilization in Nigeria: A new Keynesian approach

The study examined the impact of public debt shocks on Nigeria’s macroeconomic stability. This study aimed to evaluate the role of increasing public debt on macroeconomic variables in Nigeria using a New Keynesian approach to evaluate the effect of both external and domestic debt on macroeconomic stability and the impact of debt service on revenue on Nigerian macroeconomic stability. The dynamic stochastic general equilibrium model was adopted as an analytical tool using the Bayesian approach in a Matlab R2021a in a Dynare 4.6.4 environment to determine the influence of public debt shock on macroeconomic stability in Nigeria. It was discovered that a positive relationship exists between output (economic growth) and foreign debt in Nigeria within the period under review. It was also found that debt service to revenue ratio, interest rate, and domestic debt have a negative relationship with output (economic growth). As a result, an increase in external debt will positively impact output (economic growth). In contrast, an increase in the debt service to revenue ratio, interest rate, and domestic debt will have a negative transmission effect on Nigeria’s macroeconomic stability. High debt service would impede growth by reducing public resources and productive investment that would otherwise be used to encourage growth. According to this result, external debt is the best option for capital projects rather than domestic debt, which is likely to affect the business environment negatively. This study is practically relevant to government, investors, scholars, and policymakers, especially those around fiscal policy, to guide them in advising the government on where to borrow for its capital projects when needed

Does external debt drive inflation in Sudan: evidence from symmetric and asymmetric ARDL approaches

PurposeThis study aims to examine the symmetric and asymmetric impact of external debt on inflation in Sudan from 1970 to 2020 within a multivariate framework by including money supply and the nominal effective exchange rate as additional inflation determinants.Design/methodology/approachThe authors utilize an Auto Regressive Distributed Lag (ARDL) model to examine the symmetric impact of external debt on inflation, while the asymmetric impact is examined using a Nonlinear ARDL (NARDL) model. The existence of a long-run relationship between inflation and external debt is tested using the bounds-testing approach to cointegration, and a vector error-correction model is estimated to determine the short parameters of equilibrium dynamics.FindingsThe linear ARDL model results show that external debt has no statistically significant impact on inflation in the long run. On the contrary, the results of the NARDL model show that positive and negative external debt shocks statistically affect inflation in the long run. The estimated long-run elasticity coefficients of the linear and nonlinear ARDL models reveal that the domestic money supply has a statistically significant positive impact on inflation. In contrast, the nominal effective exchange rate has a statistically significant negative impact on inflation.Practical implicationsThe reliance on symmetric analysis may not be sufficient to uncover the existence of a linkage between external debt and inflation. Proper external debt management is crucial to control inflation rates in Sudan.Originality/valueTo date, no empirical study has assessed the external debt-inflation nexus and its potential asymmetry in Sudan, and the current study aims to fill this gap in the literature.

Domestic and Foreign Debt Dynamics and Nonlinear Effects on Private Investments in Nigeria: Evidence with Asymmetric ARDL and Causality

The ultimate goal of the study was to determine the asymmetric and dynamic effects of public debt on private investment in Nigeria from 1990 to 2019. Because of the nature of data stationarity, the study then adopted the Nonlinear Autoregressive Distributed Lag (NARDL) modelling technique, which can produce both long-run and short-run parameter estimates of negative and positive decomposed values of domestic and foreign investment. The study used the Augmented Dickey-Fuller (ADF) test to ascertain the true order of integration for the study variables. The findings for the NARDL model showed a stable long-run cointegration among private investment, domestic debt, foreign debt, economic growth, inflation and real exchange rate for the study period. The results show an asymmetric relationship between domestic and foreign debts and private investments in the long run. The estimated results further show that private investment is a significant positive function of positive and negative changes in foreign debt, and a significant negative function of positive and negative changes in domestic debt in the long run, while there were significant instant positive s on impacts on domestic and foreign debt shocks in the short-run.

Exogenous variations in public debt and the private output: addressing country heterogeneity and cross-sectional dependence in a large panel

ABSTRACT Using projections from the IMF’s World Economic Outlook (WEO) database, we explore the links between public debt and the private sector by estimating the response of private output to debt shocks – defined as debt forecast errors. We address several econometric issues through a flexible dynamic panel framework that accommodates slope heterogeneity of the coefficients and cross-sectional dependence. The overall results suggest that positive shocks in public debt are detrimental to the dynamics of private output. Nevertheless, the effect becomes neutral if countries have followed a pattern of fiscal consolidation over the previous five years. The estimates at individual-level are consistent with the general findings, except for a small group of countries. For instance, a positive and significant effect of debt emerges only for one advanced country and seven emerging economies. Although high levels of indebtedness are associated with a rapid decline in the debt coefficients, a nonlinear effect in the form of a Laffer-type curve appears to be unlikely.

What are the effects of financial stress on economic activity and government debt? An empirical examination in an emerging economy

Using a Bayesian Vector Autoregressive Model (BVAR) analysis, this paper explores the link between financial stress, economic activity, and government debt in Turkiye from January 1992 to December 2020. First, using the equally variance weighting approach, we calculate a financial stress index (FSI). Second, using the FSI, we estimate the BVAR model for the Turkish economy. The results of the BVAR model reveal that a positive financial stress shock is harmful for economic activity because it raises government debt. The findings also show that a positive government debt shock increases financial stress. Surprisingly, both government debt and financial stress diminish in response to a positive shock in economic activity. The conclusions of the study have substantial implications for future fiscal policy approaches.

Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union

Abstract This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good that sovereign debt shocks can undermine in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.

Accounting for the Effect of Household Debt on Economic Growth: The Role of Markup Dynamics

This paper investigates the effect of household debt on aggregate markup, and consequently real GDP by using the local projection method found in Jordà (2005). We show that markup dynamics play a contributing role in examining the effect of household debt on real GDP. Our main empirical results are as follows: (1) An increase in household debt is positively related with aggregate markup. (2) Household consumption decreases as markup rises. (3) With the positive association between markup and household debt, real GDP and household consumption decrease in response to positive household debt shock.

Exchange rate changes on export volumes in South Africa under the inflation targeting period.

This paper examines the long run effects of the exchange rate changes on export volumes in South Africa under the inflation targeting period using the Johansen cointegration and the Engle–Granger approaches. This paper further examines whether the 2007 global financial crisis, rising government debt, and cost of credit post 2008Q4 impacted the magnitudes of determinants of export volumes. Both tests confirm a long run relationship amongst export volumes, exchange rate, and foreign income. The long run exchange rate impacts are bigger than the short run effects. Foreign income demand has bigger impact on export volumes than the exchange rate. Evidence shows that 2007 global financial crisis reduced the impact of the exchange rate depreciation on export volumes but increased the impact of the foreign income demand. This suggests relying on the exchange rate as a policy tool alone to achieve the external adjustment may not raise export volumes. The global financial crisis exacerbated the adverse effects of the exchange rate volatility on the export volumes, indicating that policymakers should implement policies that limit the exchange rate volatility. The adverse effects of the global financial crisis on export volumes were transmitted more via the consumer prices rather than the exchange rate, suggesting that South Africa lost its price competitiveness during the crisis period. Rising government debt and the cost of credit post 2008Q4 are transmitted more via the exchange rate than relative price ratios to reduce export volumes. The exchange rate volatility channel does not transmit the rising government debt shocks to export volumes.Supplementary InformationThe online version contains supplementary material available at 10.1007/s43546-022-00217-2.

Debt security forecasting models

The paper examines models for predicting Ukraine's debt security. The main purpose of the paper is to reveal the theoretical and practical component of debt security forecasting of various types of forecast models that can be used to predict debt parameters. In the course of the study, attention is focused on debt forecasting as a factor in minimizing financial and debt shocks. The interpretation of the definition of debt security in a broad and narrow sense is given. The linear trend model of forecasting debt indicators is studied and it is concluded that it acts as a fundamental element in the process of debt forecasting, but cannot guarantee high quality planning of future indicators. A study was also conducted in the context of medium-term forecasting using ARIMA and multivariate regression models, which showed satisfactory qualitative characteristics in the process of simulating future debt security parameters. Forecasting of financial and debt parameters using ARIMA models, in the context of econometric and statistical quality, showed a sufficient level of adequacy of regression equations. The ARIMA model for simulating future values of debt parameters is characterized by an approximate value of the integral debt security indicator to the regulatory level. Based on the obtained models, a comparative characteristic of the studied models is carried out with a comparison of the obtained results of the integral debt security indicator and calculation of the absolute financial strength margin indicator based on them. Based on the results of the study, it can be concluded that the use of ARIMA models and multiple regressions is the optimal method for predicting debt with a high level of adequacy of the simulated values and rather low labor costs in the procedural context. Priority areas of future research are highlighted.

Public Debt, Consumption Growth, and the Slope of the Term Structure

Abstract The debt-to-GDP ratio negatively predicts cumulative nominal consumption growth up to a 10-year horizon, resulting from the ratio’s ability to forecast lower inflation and real growth. Moreover, the debt-to-GDP ratio is positively associated with yield spreads. I rationalize these facts in a model in which positive shocks to government debt cause lower inflation and growth, making bonds attractive assets. Furthermore, because longer-term bonds are less exposed to current debt shock than are shorter-term bonds, they are better hedges, resulting in high yield spreads in high-debt states. The model highlights the importance of fiscal risk in understanding the Treasury bond market. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Public debt, inflation, and the Fiscal Theory of Price Level in emerging markets: the case of Paraguay

ABSTRACT This paper investigates the link between public debt and inflation considering the Fiscal Theory of Price Level (FTPL) with data from Paraguay. Unlike other studies, the paper also considers this relationship according to the monetary regime. The fiscal policy actions are evaluated in a monetary structural vector autoregressive combined with fiscal variables and interpreted using impulse responses. The results highlight the importance of differentiating the monetary regime while conducting the analysis. In the monetary aggregate regime with an active fiscal policy, higher public debt shocks produce inflationary pressures. Conversely, with the inflation targeting sample estimation, inflation follows its targeted path.

The Relationship Between Debt and Output

We empirically investigate the dynamic relationship between debt and output in a panel of 72 countries over the period 1970–2014 using a vector autoregression. We document two puzzling empirical findings that contrast with what is predicted by a standard small open economy model by Aguiar and Gopinath (J Polit Econ 115(1):69–102, 2007), where debt and output endogenously respond to total factor productivity shocks. First, developing countries’ debt falls after a positive output shock, while the model predicts a debt expansion. Second, output declines in developed and developing countries after a debt shock, while the model predicts higher output. The relationship between debt and output depends on the sector taking on debt (households, firms, or governments) and the source of financing (domestic versus external) and differs across countries with varying degrees of economic development or different exchange rate regimes.

Toxic Loans and Local Economic Activity: Evidence on the Costs of Public Debt Shocks

Toxic Loans and Local Economic Activity: Evidence on the Costs of Public Debt Shocks

The dynamic relationship between global debt and output

Given the ramifications of indebtedness for global growth, researchers and policymakers are keenly interested in the mechanisms underlying the linkages between debt and economic output. In our research, summarized in this article, we find that a debt shock adversely affects future economic output, and the impact is most pronounced in developing countries and in countries with a fixed exchange rate regime. This information and related results from the study are useful for policymakers considering appropriate levels of debt as well as an exchange rate regime that is most conducive to economic growth. Another important finding is that the way debt affects economic output depends on the sector, suggesting the importance of separating public debt from private debt when undertaking future empirical studies.

Information transmission between stock and bond markets during the Eurozone debt crisis: evidence from industry returns

ABSTRACT I analyse the Granger causality in distribution between sovereign bonds and industry indexes in the five European countries most affected by the debt crisis: Greece, Ireland, Italy, Portugal, and Spain. Prior research assessed the impact of the debt crisis on the financial firms, but its effect on other industries was broadly neglected. My results reveal that, at the height of the crisis, delayed shocks transmission from the sovereign bond to the stock market occurred mainly in Greece. At the industry level, there is no evidence of lagged response of the financial industry to negative sovereign debt shocks, but sovereign debt leads other industries in, at least, one country. These findings are consistent with the investor inattention hypothesis, which states that investors tend to specialise in specific markets, due to their limited availability of time and resources and the cost of information gathering, and information flows slowly across markets.

THE IMPACT OF EXTERNAL PUBLIC DEBT ON THE NATIONAL ECONOMY’S KEY MACROECONOMIC INDICATORS (CASE OF UKRAINE)

The paper empirically explores the impact of external public debt in Ukraine on key macroeconomic indicators such as real GDP growth, real effective exchange rate, and current account balance. The problem of increasing external debt affects not only the problems of balance of payments fluctuations but also economic security and economic growth. We have tested the hypotheses regarding the impact of Ukraine’s external public debt on these indicators in the short and long run. As an empirical tool for hypotheses testing vector autoregression models (VaR models) have been chosen. The results of constructed models show the acceleration of the external public debt growth provokes the GDP growth rate to fall with subsequent macrostabilization. The reaction of the GDP growth rate to the shock of the real effective exchange rate is more noticeable. The shock of real effective exchange rate has led to increase in external public debt with a further dampening to zero.Empirical data from the VaR model confirm that external debt has a negative impact on GDP and essentially behaves similarly to the shock of REER strengthening. Research results confirm the relationship between external public debt, real effective exchange rate, and GDP growth in Ukraine. Based on the models it was analyzed the external public debt and real effective exchange rate shocks influence the real gross domestic product growth rate. The growth of external public debt leads to the GDP growth rate fall by 1% during a year and a half with subsequent stabilization in the future. GDP growth fluctuations are explained mainly by their own fluctuations while external public debt is accounting for 2,5—8% of its fluctuations. Fluctuations in external public debt of 7—10% are explained by current account fluctuations in Ukraine. The described results of the model correspond to the concept of dependent economy.

Identifying external debt shocks in low- and middle-income countries

Using a unique loan-level dataset from the World Bank’s Debtor Reporting System, we construct new measures of external debt shocks for 120 low- and middle-income countries during the 1975–2018 period. We identify the shock in two steps by first calculating the difference between actual and predicted net disbursement on external debt obligation for each loan and then taking aggregation at the country-year level. During expansionary times, external debt shocks lead to persistent decreases in the external debt to GDP ratio, possibly due to the availability of other sources of financing. During recessionary episodes, however, we see heavy reliance on external debt financing for most of developing countries. This reliance is more substantial for countries with higher levels of external debt stock, raising serious concerns for debt distress in these countries and in their road to building resilience.

Information Transmission Between Stock and Bond Markets During the Eurozone Debt Crisis: Evidence From Industry Returns

I analyze the Granger causality in distribution between sovereign bonds and industry indexes in the five European countries most affected by the debt crisis: Greece, Ireland, Italy, Portugal, and Spain. Prior research assessed the impact of the debt crisis on the financial firms, but its effect on other industries was broadly neglected. My results reveal that, at the height of the crisis, delayed shocks transmission from the sovereign bond to the stock market occurred mainly in Greece. At the industry level, there is no evidence of lagged response of the financial industry to negative sovereign debt shocks, but sovereign debt leads other industries in, at least, one country. These findings are consistent with the investor inattention hypothesis, which states that investors tend to specialize in specific markets, due to their limited availability of time and resources and the cost of information gathering, and information flows slowly across markets.

Crisis Cultures: The Rise of Finance in Mexico and Brazil

Crisis Cultures: The Rise of Finance in Mexico and Brazil