High Levels Of Public Debt Research Articles

Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence

We examine the cyclical properties of development aid using bilateral data for 22 donors and over 100 recipients during 1970‒2005. We find that bilateral aid flows are on average pro-cyclical with respect to business cycles in donor and recipient countries. However, they become counter-cyclical when recipient countries face large adverse shocks to the terms-of-trade or growth collapses - thus playing an important cushioning role. Aid outlays contract sharply during severe donor economic downturns; this effect is magnified by higher public debt levels. Additionally, bilateral aid flows are higher in the presence of IMF programs and are more counter-cyclical for recipient countries with stronger institutions.

Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence

We examine the cyclical properties of development aid using bilateral data for 22 donors and over 100 recipients during 1970?2005. We find that bilateral aid flows are on average procyclical with respect to business cycles in donor and recipient countries. However, they become countercyclical when recipient countries face large adverse shocks to the terms-of-trade or growth collapses-thus playing an important cushioning role. Aid outlays contract sharply during severe donor economic downturns; this effect is magnified by higher public debt levels. Additionally, bilateral aid flows are higher in the presence of IMF programs and are more countercyclical for recipient countries with stronger institutions.

Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence

We examine the cyclical properties of development aid using bilateral data for 22 donors and over 100 recipients during 1970?2005. We find that bilateral aid flows are on average procyclical with respect to business cycles in donor and recipient countries. However, they become countercyclical when recipient countries face large adverse shocks to the terms-of-trade or growth collapses-thus playing an important cushioning role. Aid outlays contract sharply during severe donor economic downturns; this effect is magnified by higher public debt levels. Additionally, bilateral aid flows are higher in the presence of IMF programs and are more countercyclical for recipient countries with stronger institutions.

Fiscal adjustment in EU countries: A balance sheet approach

Several European Union countries have recently implemented or are envisaging fiscal operations which improve budgetary figures but have no structural impact on government finances. We evaluate some of these measures using a balance sheet approach. In particular, we examine the degree to which reductions in government debt in EU countries has been accompanied by a decumulation of government assets. In the runup to Maastricht we find a strong correlation between changes in government liabilities and government assets, and larger declines in government assets in countries starting from higher public debt levels.

The dynamics of a newly floating exchange rate: the Turkish case

In recent years, many emerging market economies have switched or are in the process of switching to a floating exchange rate regime. Most of these economies have a history of high inflation and a high level of foreign currency denominated debt. Therefore, the stability of the exchange rate and the dynamics of its volatility are more crucial than before. This paper analyses the dynamics of exchange rate in Turkey in the aftermath of recent float in February 2001. The Turkish experience is a particularly important one, and provides valuable lessons for other countries as the Central Bank is trying to simultaneously contain the volatility of exchange rate and pursue an implicit inflation targeting policy. The reported findings indicate that the Central Bank policies, accompanied with favourable external factors, were effective in taming the volatility of the exchange rate in a relatively short period of time. However, there is a significant real appreciation of the currency during the same period. Given the high level of public debt and real interest rates, the current state of the economy is very susceptible to any adverse shocks.

Fiscal Adjustment in EU Countries: A Balance Sheet Approach

Several European Union countries have recently implemented or are envisaging fiscal operations which improve budgetary figures but have no structural impact on government finances. We evaluate some of these measures using a balance sheet approach. In particular, we examine the degree to which reductions in government debt in EU countries has been accompanied by a decumulation of government assets. In the run-up to Maastricht we find a strong correlation between changes in government liabilities and government assets, and larger declines in government assets in countries starting from higher public debt levels.

Sectoral Balance Sheet Mismatches and Macroeconomic Vulnerabilities in Colombia, 1996-2003

We employ an extended version of the Allen et al. (2002) Balance Sheet Approach to examine macroeconomic vulnerabilities in Colombia between 1996 and 2003, based on an unusually rich data set. We find that vulnerabilities existing prior to Colombia's 1999 recession-high levels of private debt, a large negative foreign currency position of the corporate sector, and banks' exposure to stretched households and companies-receded subsequently. New vulnerabilities emerged, however, especially the high level of public debt accumulated until end-2003, and growing exposure of the financial sector to the sovereign.

Sectoral Balance Sheet Mismatches and Macroeconomic Vulnerabilities in Colombia, 1996-2003

We employ an extended version of the Allen et al. (2002) Balance Sheet Approach to examine macroeconomic vulnerabilities in Colombia between 1996 and 2003, based on an unusually rich data set. We find that vulnerabilities existing prior to Colombia's 1999 recession - high levels of private debt, a large negative foreign currency position of the corporate sector, and banks' exposure to stretched households and companies - receded subsequently. New vulnerabilities emerged, however, especially the high level of public debt accumulated until end-2003, and growing exposure of the financial sector to the sovereign.

Symposium Introduction: Monetary and Fiscal Policy in Theory and Practice

At 1997 Annual Meeting of American Economic Association five eminent but diverse economists participated in a symposium on whether there is a core of practical macroeconomics that could be confidently used, especially to underpin macroeconomic policy. The papers were published as Blanchard (1997), Blinder (1997), Eichenbaum (1997), Solow (1997) and Taylor (1997). Given diversity of five there is a remarkable degree of agreement. All five agree that in long run there is no trade off between unemployment and inflation and that trend movements in real variables such as output, employment and unemployment are determined by supply side. Aggregate demand has little place in long run analysis. As Solow put it, the appropriate vehicle for analysing trend motion is some sort of growth model, preferably mine (1997, p. 230). There is also agreement that in short run, due to wage and price rigidities and perhaps expectation factors, monetary policy can and does affect levels of output, employment and unemployment. Moreover, there is a short run trade off between unemployment and inflation. Views on how to balance costs of unemployment against cost of inflation can be expected to vary among economists, but since monetary policy is in hands of central bankers, generally a conservative group of people, most weight is given to keeping inflation rate low. In a number of countries this goal is explicitly made major responsibility of central bank. In Australia Government has given in writing Reserve Bank a target for inflation but no other explicit targets, although unemployment is ranked equally with price stability as goals in legislation establishing Reserve Bank. The five economists also agree that in short run fiscal policy as well as monetary policy can influence output, employment and unemployment, though their theoretical reasons for this differ. Eichenbaum argues that discretionary fiscal policy is desirable nor politically feasible (1997, p. 236), since long lags in implementation (in United States, at least)1 may make use of fiscal policy counterproductive. Also there are worries about use of expansionary fiscal policy when level of public debt is high. In Australia neither of these objections carry much weight. Fiscal policy measures can be, and have been, introduced whenever thought desirable and not just in annual budget. Moreover, expansionary fiscal policy measures usually are approved without delay by both Houses of Parliament. Eichenbaum's statement about undesirability of fiscal policy may reflect a widespread concern about use of expansionary fiscal policy when there is a high level of public debt. In Australia public debt is so small as to be virtually non-existent. This core of macroeconomics has become known as new consensus or new neoclassical synthesis. It is described in more detail in articles in this symposium by Hart and by Kriesler and Lavoie. Hart goes further and sets out in detail theoretical structure on which new consensus is based. Both articles are highly critical of this new consensus. The discussion may sound like a doctrinal discussion among economic theorists. But it does affect policy making in real world. As Blinder points out, this sort of discussion potentially affects well-being of hundreds of millions of people around globe (1997, p.243). The article by Kriesler and Lavoie is a critique of this new consensus, or new neoclassical synthesis, that draws particularly on work of Post Keynesian economists.2 Kriesler and Lavoie reject conclusions of new consensus about relationship between unemployment and inflation in both short run and long run. They argue that, over a large range of unemployment rates, changes in rate of unemployment have no effect on rate of inflation. Moreover, level of economic activity is often such that unemployment is in this range. …

Politökonomische Erklärungen Zum Abbau Der Staatsverschuldung – Eine Erweiterte Perspektive

Abstract Since the 1970s many industrial countries constantly accumulated public debt. This was a new phenomenon that had not been observed in the years before. Scientists tried to find explanations and analysed the development mainly from a public choice perspective. In the meantime signs occurred showing that the trend has reversed. Again, it was looked for explanations. Some authors tried to explain the observed shift towards a strategy of budget consolidation with changes in political ideologies and institutions. Others explained the phenomenon with the fiscal constraints which can be a long term consequence of high levels of public debt. However, some important questions remained open. This paper pursues the question whether the change in the public-debt-policy of politicians can be embedded into a broader framework. This broader framework should not only allow to analyze the development of public debt as a result of the debt-related policy of politicians in a narrow sense, but as a result of political decisions relating to government spending and taxation in general, i.e. from a public budget perspective in total.

The Inefficient Use of Power: Costly Conflict with Complete Information

Recent work across a wide range of issues in political economy as well as in American, comparative, and international politics tries to explain the inefficient use of power—revolutions, civil wars, high levels of public debt, international conflict, and costly policy insulation—in terms of commitment problems. This paper shows that a common mechanism is at work in a number of these diverse studies. This common mechanism provides a more general formulation of a type of commitment problem that can arise in many different substantive settings. The present analysis then formalizes this mechanism as an “inefficiency condition” that ensures that all of the equilibria of a stochastic game are inefficient. This condition has a natural substantive interpretation: Large, rapid changes in the actors' relative power (measured in terms of their minmax payoffs) may cause inefficiency.

Fiscal Adjustment in Eu Countries: A Balance Sheet Approach

Several European Union countries have recently implemented or are envisaging fiscal that operations improve budgetary figures but have no structural impact on government finances. This paper evaluates some of these measures using a balance sheet approach. In particular, it examines the degree to which reductions in government debt in EU countries has been accompanied by a decumulation of government assets. In the run-up to Maastricht (1997) it finds a strong correlation between changes in government liabilities and government assets, and larger declines in government assets in countries starting from higher public debt levels.

Some Fiscal Implications of Monetary Policy

We study the implications of alternative monetary targeting procedures for real interest rates and economic activity. We find that countercyclical monetary policy rules lead to higher real interest rates, higher average tax rates, lower output but lower variability of tax rates and consumption relative to procyclical rules. For a country with a high level of public debt (e.g. Italy), the adoption of a countercyclical procedure such as interest rate pegging may conceivably raise public debt servicing costs by more than half a percentage point of GNP. Our analysis suggests that the current debate on the targeting procedures of the European Central Bank ought to be broadened to include a discussion of the fiscal implications of monetary policy.

Die Steuerreform: Zum “Wann und Wie” der Durchführung

Abstract Concerning the Tax Reform 2000 point of time and design are controversial. Because of the anyway high level of public debt a pre-drawing of the next stage of tax reform can not be financed by government borrowing argues Rolf Peffekoven. Furthermore he points out that “Länder und Gemeinden” have to accept additional public debt. Though additional tax cut is necessary for higher growth and higher employment, it must be financed by cutting down public spending, particularly transfer payments and subsidies. The different treatment of revenues contravenes the tax structure and leads to efficiency losses. Therefore Peffekoven contributes that a reform must take into consideration the principle of equal treatment, independent of source. But a comprehensive tax reform is linked to the abolishment of German trade tax (Gewerbesteuer). Manfred Rose evaluates German tax reform by highlighting the conceptual framework that various reform measures can be attributed to. Due to a lack of understanding as regards economic effects of taxes, the German system of taxing personal and corporate income has become arbitrary and complicated. This makes the case for a fundamental reform towards an efficient, equitable and simple tax system. While some of the measures taken in the German tax reform contribute to a more efficient and equitable system, others seem to aggravate existing problems. This applies to income as well as corporate taxation. In his final section Rose characterizes a possible reform direction as proposed in the “Einfachsteuer” - a proposal for a fundamental reform of the German tax system. Wolfgang Schön determinates that although the year 2001 confronted taxpayers, tax advisors and tax administration with the largest tax reform for decades, the advocates of another, even more comprehensive tax reform raise their voice. They will have to bear in mind that a coming reform must answer various questions, the author argues. For example: Shall we retain the classical income tax or move to a consumption-based approach? How shall we reach tax neutrality with respect to the legal form, the source of income, the finance side of an investment and the allocation of profits? What substitute do we find for the anachronistic trade tax (“Gewerbesteuer”)? How do we guarantee the international compatibility of German tax law after another fundamental tax reform?

Currency Crises and Fiscal Imbalances: The Transition Countries Perspective

The financial innovations and increased integration of capital markets have made the nature of balance of payments turmoil much more complex, than described by firstgeneration models. The severe financial crises, which erupted in 1990's in many seemingly invulnerable economies that in most cases were characterised by a balanced budget and a modest public debt have turned away the attention of analysts and policymakers from fiscal variables towards other determinants. The fiscal factors, nonetheless, still remain among important causes of financial turbulences, especially in emerging markets, what has been manifested by the 1998/1999 crises of FSU (Former Soviet Union) economies. The purpose of this paper is to re-examine the theoretical and empirical links between fiscal sector and the emergence of financial crises, with an emphasis on transition economies. It outlines the main theoretical channels and seeks for the empirical evidence of the influence of fiscal sector on the vulnerability to currency crises in developing and transition countries. Using a large sample of developing and transition countries, it examines the pattern of fiscal variables before and during the crisis, to see whether, on average, the behaviour of fiscal variables during a crisis is different form tranquil periods. The results indicate, that in the case of developing as well as Central European and CIS countries, the crisis is, on average preceded by larger, than in normal times, fiscal deficits and higher level of public debt. The paper also assesses the recent series of financial crises that have emerged in FSU economies. These turbulences, have once again demonstrated the crucial role of fiscal sustainability in the overall vulnerability to negative external developments. The FSU countries, which experienced a crisis, did, on average, exhibit more widespread fiscal weaknesses and/or their external liabilities were more vulnerable to turbulences than other countries in that group. However, the fiscal imbalances of FSU economies were not just a consequence of the conducted fiscal policy. They were also a manifestation of the deeper structural shortcomings and the lack of consistent reforms: soft budget constraints across the economy, weak governments, inefficient tax systems, Soviet-type budget expenditures. Overall, empirical research indicates that in developing and transition countries, fiscal variables remain among factors that increase the likelihood of exchange rate and financial pressures.