Demand For Debt Research Articles

The ecological currency hierarchy: empirical support for currency power driven asymmetries in environmental and social autonomy

ABSTRACT The intersection of the International Monetary System (IMS) and ecological degradation and social inequality remains, despite some excellent examples, a relatively underexplored area. This paper draws upon the literature to argue that an ecological currency hierarchy (ECH) describes how a hierarchy of currencies grants Core countries considerable autonomy over their economic direction while Periphery countries are subject to conditions in the Core. As capital continuously seeks returns, Core economies can sell debt regardless of global economic circumstances, while the Periphery may only do so when returns in the Core are high and risk tolerance is high. When conditions in the Core offer low returns on investment, foreign direct investment floods into the Periphery driving up their debt levels and material extraction. This structural debt/material extraction dynamic is a function of having a non-Core currency and leaves Periphery countries unable to engage in long-term, autonomous economic planning. We conduct econometric analyses using World Bank, International Monetary Fund, and International Resource Panel data to confirm that having a Core currency increases demand for debt and lowers material extraction, while also confirming that rates of return on investment in the Core drive foreign direct investment, debt, and material extraction in the Periphery.

FDI and import competition and domestic firm's capital structure: Evidence from Chinese firm-level data

This study explores how foreign competition impacts the capital structure of domestic firms. While existing literature reveals that import competition is associated with a decrease in domestic firms' leverage, we propose a novel perspective concerning the positive effect of inward foreign direct investment (FDI) on leverage. FDI competition can boost demand for debt via productivity spillover to domestic firms, and also increase supply of debt by inducing lenders to herd toward foreign investors. Using Chinese firm-level data, we find that the positive effects of industry inward FDI on domestic firms' leverage are more pronounced in high-tech industries, industries with higher productivity growth, and industries where foreign investors exhibit a higher degree of herding behavior. Our instrument variable approach, employing industry exchange rates and import tariffs, supports these findings. Additionally, we reveal that the positive effect of FDI on local firms' leverage is amplified when the firms have stronger absorptive capacities, receive foreign capital, and experience more human capital transfers from foreign rivals.

The effect of environment, social and governance on demand and supply of debt

ABSTRACT This paper investigates how Environment, Social and Governance (ESG) performance affects the zero-leverage phenomenon. Using a sample of European-listed firms for the 2002–2020 period and bivariate probit models with partial observability, we find that a greater ESG performance decreases the firm’s propensity to have zero leverage. The negative effect of ESG performance on zero leverage is determined by creditors-related reasons and not by firms’ own decisions, since it only impacts significantly the supply of debt. Creditors seem to be willing to grant debt at more favourable conditions to firms with greater ESG performance. Using propensity score methods, we estimate that a greater ESG performance decreases a firm’s zero-leverage propensity by approximately 3.9% points.

Evaluating the nonlinear relationship between nonfinancial corporate sector leverage and financial stability in the post crisis era

<abstract> <p>This paper analyzes the relationship between the nonfinancial corporate sector leverage (NFCL) and financial stability in the post crisis era, revealing considerable heterogeneity across the level of financial intermediation (FI). First, we use the financial soundness indicators proposed by the IMF and the generalized dynamic factor model (GDFM) to measure the financial stability represented by the FSI of OECD countries. Second, in a panel quantile regression framework, we examine the effects of NFCL on FSI for different quantiles of FSI. The result shows that the impact of NFCL on financial stability at different levels is asymmetric, which reflects differences in the supply and demand of debt. Third, this paper further discusses the transmission mechanism of FI between NFCL and FSI based on the panel smooth transition regression model (PSTR). We find that the transmission channel of NFCL to financial stability depends on the level of financial intermediation, but with diverging magnitude for the different levels of FI.</p> </abstract>

Demand Shocks for Public Debt in the Eurozone

AbstractIn this paper we use intraday government bond futures price changes around German and Italian Treasury auctions to identify unexpected shifts in the demand for public debt. Estimates show that positive demand shocks lead to large negative movements in Treasury yields. Evidence shows significant spillover effects into Treasury bond, equity, and corporate bond markets of other eurozone countries. We find interesting differences in the effects of demand shocks between the two countries, consistent with the “safe‐haven” status of German bonds versus the “high‐debt” status of Italian Treasuries. Results suggest that these effects are stronger during periods of high financial stress.

Macroeconomic Volatility and its Significance to the Rising External Indebtedness of Nigeria

The motivation of this study has been to identify the effects of the multidimensional perspectives of macroeconomic volatility on the growth of external debt in Nigeria from 1970 to 2018. Methodologically, the Auto-Regressive Distributed Lag (ARDL) model and the TodaYamamoto causality approach were adopted. For the purpose of understanding the multidimensional perspective of macroeconomic volatility, macroeconomic volatility was disaggregated into three different perspectives which are: volatility from macroeconomic outcomes, domestic sources, and external sources. Findings from the study suggest that while volatility from macroeconomic outcomes exclusively affects external debt in the long-term, effects from the three sources were very substantial in the short-term. Furthermore, the causality result indicates bidirectional nexus between volatility from macroeconomic outcomes and external debt. Also, the irregular variations in the Nigerian political space, unanticipated disease outbreaks, and the effects of the 1986 recession in the country all significantly worsened the country’s external debt situation. Thus, the study recommended amongst others that since developing countries such as Nigeria cannot do away with the demand for external debt to finance its economic growth, it is also important to count the cost such financing provides even if faster growth is actually realise.

Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking

In this paper, we study the interactions between fiscal and monetary policy in a frictional economy where fiat money, bank deposits and short-term and long-term nominal government bonds coexist. Since agents face information frictions and bankers have limited commitment, bank deposits need to be collateralized with nominal public debt. These bank deposits can only be used as payment instruments in some states, while fiat money is always accepted. Within this frictional environment, we study monetary and fiscal policy interactions under different policy stances. When the monetary authority follows an active policy regime, a unique stationary equilibrium exists regardless of how the supply of the various nominal government bonds is specified. Under this policy regime, we also find that consumption inequality increases when the central bank pursues an expansionary monetary policy. In contrast, when the fiscal authority pursues active policies, real indeterminacies can exist. However, when the fiscal authority issues sufficiently few long-term (or short-term) bonds, a unique steady state exists. We also identify cases where an expansionary fiscal policy leads to a decline in consumption inequality between money transactions and deposit-backed transactions. Finally, regardless of the policy regime chosen by the government, financial innovations alter the relative demand for public debt and do not always lead to an increase in welfare. The financial innovations alter the underlying monetary and fiscal policy interactions and consumption inequality.

Money and Debt Demand: A Cyclic Model

The author attempts to reconstruct the money demand theory in the context of “debt demand,” by discussing the money demand of households and the debt demand of enterprises separately. This paper outputs the money demand function of the household sector and the debt demand function of the enterprise sector in a two-sector economy, and their cyclic models based on the analysis of income and consumption mismatch in economic entities. In addition, money velocity is internalized by introducing the average money duration and the average debt cycle. Finally, in a logically consistent way, the mechanism of financial crises in the economic cycle is interpreted by the monetary debt cycle model proposed in this article.

Inefficient Regulation: Mortgages versus Total Credit

We study the impact of loan-to-value regulation on supply and demand for unregulated debt that is used for home acquisition. In our setting, part of the dwelling price is in the form of pre-existing debt exempt from the regulation. Variations in the latter prior to the LTV regulation generated exogenous variation in the regulatory requirements across buildings. We find that households, especially constrained ones, start paying more for dwellings financed with more unregulated debt. Our estimates reveal a willingness to pay for alternative home financing of about 250 percent above the prevailing mortgage rate. In the longer run, the supply of unregulated debt increases by almost 50 percent. We corroborate our findings by aggregating evidence from 13 countries.

Growth of Fixed Capital Investments in the Regional Economy by Increasing Debt Financing

An increase in fixed capital investments is necessary for accelerating the growth of the Russian regions and the economy as a whole and requires increased financial resources. The paper considers the possibility of increasing financial resources of regional companies by attracting additional debt financing. The proposed methodology determines the potential demand for debt financing, considering the performance requirements ensuring financial stability. The paper analyses how an increase in debt financing influences credit rating of a company as well as the cost of debt financing attraction. Unlike other works, this paper considers the debt capital structure of companies. Additionally, the study proposes a methodology for identifying changes in the coefficient of interest coverage (that affects credit rating of companies) depending on various debt financing structures. The application of the developed methodology allowed determining the potential increase in debt financing, which is necessary for the investment of regional companies. Debt financing can increase by 1.7 times (43.5 trillion roubles) in Russia in general, 1.4 times in the Sverdlovsk region, 2 times in the Tyumen region, and 1.6 times in the Chelyabinsk region. There are no opportunities to increase debt financing in the Kurgan region. A reduction in interest rates on loans to non-financial companies allows expanding debt financing of the Russian economy without lowering the credit rating. The study results can be used to determine the potential demand for debt financing from companies, industries, regions and the economy as a whole. Further research may consider the validity of the policy of high interest rates on loans to non-financial companies for achieving high economic growth.

Driven to Debt: Social Reproduction and (Auto)Mobility in Los Angeles

Since the financial crisis of 2008, subprime lending in the United States has flourished in auto loan markets. This article charts, for the first time, some of the contours of this underresearched part of the subprime landscape. In so doing, it makes two contributions. First, it widens and resituates debates about subprime lending by building on a suite of feminist political economic scholarship to argue that the sites, practices, and agents of social reproduction provide an essential—and largely neglected—perspective on the endurance and deepening of subprime markets. Second, the article leverages the intrinsically geographical, place-bound nature of social reproduction to provide a more holistic treatment of the financialization of everyday life. The article uses (auto)mobility as a novel vantage point from which to connect hitherto disparate social science literatures on financialization, transportation planning, welfare, and urban form. Drawing on secondary data and qualitative fieldwork in Los Angeles, the research explores the proliferation of subprime auto lending and the gendered, raced, and classed inequalities in mobility that mediate everyday life—the daily commute, the school run, the grocery shopping trip—and the demand for subprime debt.

Does Government Debt Crowd Out Corporate Investment? A Bank Lending Channel

Bank loans are an important source of financing for governments, accounting for 19% of total public sector debt in EU countries. Using the French credit register over 2006-2018 and leveraging variation in public sector debt dynamics at the bank-location level, I show that increases in the demand for bank debt by public sector entities causally crowd out bank lending to private corporations. When public sector entities borrow an additional 1€ from the median bank, this bank lends 0.78€ less to the private sector, with sizeable effects on firm-level investment. My results suggest that crowding out effects may substantially reduce (local) fiscal multipliers.

Internal models for deposits: Effects on banks' capital and interest rate risk of assets

This study first investigates why only some banks use the internal models (IMs) introduced by Basel II that lead to more risk-sensitive capital ratios than standardized approaches (SA). I predict that banks opt for an IM if it allows economizing on capital requirements, given their underlying risk. I find support for this hypothesis by analyzing Mexican banks’ adoption of an IM for deposit maturity, a key input to measure interest rate risk, between 2006 and 2016. Secondly, I examine whether banks increase the duration of assets after IM adoption—high-maturity assets can be offset with deposits, leading to a lower risk exposure and additional capital savings. For the average maturity of total assets, I find no support for this conjecture. However, when a flattening of the yield curve spurs firms’ demand for high-maturity debt, micro data reveal that banks using the IM increase the duration of commercial loans more than those using the SA. These findings have broad implications for the design of internal risk models and of capital regulation.

Modeling the Behaviour of Corporate Demand for Credit in Mauritius before and after the Global Financial Crisis Under Conditions of Excess Liquidity by Banks

This Paper proves that the global financial crisis (GFC) has had a major influence in altering the pattern and subsequent demand for corporate finance in Mauritius. By applying probability models, it is found that bonus issuance is a key factor that influences the demand and supply for both debt and equity financing. Firms consider debt repayment variable of upmost essence to loan application and provision responses. Large companies, comprising of entities falling under the wing of the manufacturing, industrial and retail sector found ease in obtaining bank loans prior to the crisis due to the positive rating and nature of their respective businesses. Conversely, small and medium enterprises found themselves relaying heavily on startup loans, of limited amounts, as they failed to qualify for greater loan applications due to their inability to meet the adequate requirements. Corporate entities on their end, had a much greater preference for equity financing prior to the crisis. The aftermath of the crisis nevertheless negatively influenced the pattern of financing for all categories of businesses. A more regulated framework was adopted by banks, on an international level which caused banks to be more cautious and limited in providing finance to entities. Even with excess liquidity, banks have declined demand for bank loans.

The zero-leverage phenomenon: A bivariate probit with partial observability approach

The empirical literature on zero leverage investigates why some firms are debt-free using standard logit and probit specifications. However, such models are not suitable to provide a direct answer to the main research question that arises in this context: is zero leverage a financial decision of the firm or an imposition raised by creditors? This paper examines the factors that affect the demand for debt and the supply of debt using bivariate probit models with partial observability in the sense of Poirier (1980), providing empirical evidence on the zero-leverage phenomenon for European listed firms during the period 2001-2016. We find that some variables influence in opposite directions debt demand and supply, or affect significantly only of them. In particular, firms’ profitability affects negatively debt demand but positively debt supply; asset tangibility increases the willingness of creditors to grant debt but does not influence debt demand; and the recent European crises reduced the propensity of firms to resort to debt but did not affect debt supply. We also find that firms in countries with common law systems, market-based financial systems and stronger protection to investors’ and creditors’ rights are more prone to have zero leverage due to both demand and supply effects.

Public debt and the world financial market

World public debt has increased by 30% of world GDP between 2007 and 2017. During the same period, the real interest rate on public debt has fallen by roughly 200 basis points, whereas it should have increased by 100 basis points according to previous estimates. This reveals that demand for public debt has increased faster than supply. Where does the increase in savings come from? To answer this question, we construct the world financial market equilibrium to identify the country and agents across countries who increased their saving rate. Using the equality between the sum of private and public saving and investment at the world level, we observed four key phenomena. First, the world investment rate has been slightly increasing during the period, with an impressive shift of investment in China. The investment rate of China was 6% of world GDP in 2007. This jumps to 12% in 2017. Second, during the 2007-2017 period, the world experienced an impressive reduction of global imbalances. The Chinese saving rate increased less than Chinese investment, and the US saving rate increased more than US investment. Third, the increase in the world saving rate came from highly indebted countries before 2007, mostly from the US and southern Europe. The increase in the current accounts of Italy, Spain and Greece (from a negative territory) is the order of magnitude of the increase in the US current account. Fourth, there is no clear relationship between the household saving rate and national government borrowing, thus not confirming the Ricardian equivalence view. Finally, it seems that the factors generating a high net saving rate in China are temporary, whereas the deleveraging of US and southern Europe may be long-lasting. As a consequence, one can expect low interest rates for a long period of time.

Demand Shocks for Public Debt in the Eurozone

In this paper we use high-frequency (intraday) government bond futures price changes around German and Italian Treasury auctions to identify unexpected shifts in the demand for public debt. Estimates show that positive demand shocks lead to large and persistent negative movements in Treasury yields. There is also evidence of significant spillover effects into Treasury bond, equity and corporate bond markets of other euro area countries. We find interesting differences in the effects of demands shocks between the two countries, which are consistent with the safe-haven status of German bonds versus the high-debt status of Italian Treasuries. Results also suggest that these effects are stronger during periods of high financial stress.

IMPACT OF INTERNATIONALIZATION ON THE CAPITAL STRUCTURE OF COMMERCIAL COMPANIES

International enterprises (in this paper, international companies are understood as companies that sell their products and services abroad) are precious for the national economy because, through their experience in international sales, they stimulate the development of other companies in the same industry and their subcontractors. The knowledge that these companies have gained on international markets through the spillover effect spreads on their suppliers, as well as through imitation or cooperation on their competitors. Also, international companies (in the meaning: domestic export companies) are often the first to use new technological solutions and product innovations, which contributes to the modernization of products in the entire business sector. Dynamic and robust international companies usually also build networks with entities from different countries in order to cooperate on development, negotiation, and sales, which also encourages similar activities of their competitors. For all these reasons, national governments should take action to help to export companies, or at least monitor the problems that such entities report. The purpose of the publication is to draw attention to the higher demand for the debt that exists in such enterprises and to discuss the reasons for this. In particular, the purpose of the publication was to verify 2 research hypotheses: H1: Internationalization increases indebtedness of a company measured with the debt to equity ratio, and H2: The scale of internationalization (measured with the share of foreign sales to total sales) is positively related to the level of indebtedness (measured with the debt to equity ratio). For both hypotheses we found no grounds to reject these hypotheses. In the opinion of the authors, the demand for debt from exporters should be monitored, especially in terms of the availability of this form of financing for exporters from the SME sector. The paper used the Arellano-Bond model and data downloaded from the Orbis database for years 2007 – 2017.

Common Sense Economics

For decades Wall Street professionals and academics have been perplexed by decreasing interest rates in the United States in an environment of increasing debt. This focus on the supply of debt has led to many failed prognostications regarding impending interest rate increases. The bond vigilantes of 1980 have given way to current incoherent talk of central bank financial repression. This analysis looks at wealth inequality and the demand for debt and shows how it causes interest rates to decrease and how wealth inequality stalls the consumer-demand side of the economy. Wealth inequality leads to an unbalanced economy just as total wealth equality would also lead to an unbalanced economy. Interest rates are the signal telling us about the spread of wealth distribution in the economy and the balance we need to strike.

Demand and Supply for Debt and Equity Capital

The following analysis explore the effects of demand and supply for both debt and equity capital in the market on the firms’ time varying capital structure. Firms’ characteristics, CEOs’ characteristics and macroeconomics factors are included as independent variables in the regression model to explain the variation in the capital structure which is proxied by total debt to total asset ratio.