Increase In Government Debt Research Articles

Debt erosion: Asymmetric response to demand and supply shocks

This paper explores the effect of inflation supply and demand shocks on government debt for a sample of 32 advanced economies and 24 emerging markets from 1970 to 2022. The shocks are identified using a sign-restricted structural vector autoregression model with quarterly data. Estimations of dynamic panel regressions and local projections suggest that supply shocks lead to persistent increases in government debt, while demand shocks result in long-lasting declines. Furthermore, high debt levels amplify the impacts of both supply and demand shocks by more than three times. Specifically, supply shocks contribute to an increase in debt through elevated borrowing costs and prolonged depreciation, whereas demand shocks erode debt through persistent improvements in the primary balance, driven by increased revenues.

Key Factors Affecting Sustainable Economic Growth in the New Normal Era: An Empirical Analysis of Country Data

Purpose - The global economy has entered a new normal era since the financial crisis of 2007 and 2008. In fact, advanced countries and those emerging have been faced with low growth, low interest rates, low prices, high unemployment, increased government debt, and stricter regulations. Nonetheless, some countries have achieved sustainable economic growth. We attempted to identify factors influencing sustainable economic growth in this era by empirically testing a model with data regarding economic indicators in 25 countries. Design/Methodology - For this empirical test, a panel model was set with nine economic variables for 14 advanced and 11 emerging countries. We conducted both a panel unit root test and a cointegration test in order to measure the stationarity of the data. The results of these tests presented that there have been long-term balanced relationships among the variables. We also conducted another empirical analysis through the fixed effects model and random effects model, and performed a Hausman test to confirm that the fixed effects model was more valid. Findings - Empirical evidence using the fixed effects model showed that the consumption level, capital formation, openness of international trade, urbanization, and innovation ability were significant in promoting the economic development of developed countries, whereas population has a negative impact on the economic development of these countries. In emerging economies, capital formation and education level had a positive effect on sustainable economic growth. Population, openness to international trade, urbanization, and industrial structure had negative impacts on sustainable economic growth. This research contained a certain level of originality in the sense that we analyzed the effects of critical economic indicators on the sustainable economic growth in representative countries that have developed economically in the new normal era. Originality/value - Few studies focus on the inf luencing factors of sustainable economic development in a specific country. We may provide important implications for economic policy makers that want to grow their economies sustainably. We also may enrich a theoretical and practical basis on economic development.

Effect of Increasing Government Debt Profile on Economic Prosperity of Nigeria

The study aimed at assessing the effect of increasing government debt profile on economic prosperity of Nigeria. Specifically, the study examined the extent that Gross Domestic Product (GDP) was affected, during the period of study, by rising domestic debt, external debt, and cost of borrowing in Nigeria. The data for analysis were sourced principally from CBN Bulletins and Debt Management Office. The null hypotheses that domestic debt, external debt, and cost of borrowing do not significantly affect Gross Domestic Product, were tested through a multiple regression analysis. The findings indicate that Domestic Debt has a positive and significant effect on Gross Domestic Product in Nigeria with coefficient of 1.005965 and p-value of 0.0000. Furthermore, the external debt stock reveals a negative and non-significant effect on Gross Domestic Product with coefficient of -0.083963 and p-value of 0.5909, while Cost of Borrowing exposes a positive and non-significant effect on Gross Domestic Product in Nigeria with coefficient of 0.038835 and p-value of 0.7589. The R-squared (Coefficient of Determination) indicates that 98% of the variations in Gross Domestic Product in Nigeria could be explained by changes in Domestic Debt, External Debt and Cost of Borrowing. The implication of the findings is that economic prosperity is facilitated by Domestic Borrowing while External Borrowing must be avoided where possible because of its’ negative effect on GDP. In addition, the effect of Cost of Borrowing on GDP is purely dependent on the appropriateness of use of borrowed fund. The study recommended that government should first explore internal sources of fund whenever borrowing is unavoidable in preference to foreign/external sources, reduce or avoid external borrowing and properly apply the borrowed fund for its economy to prosper.

Tax Cuts Impact on the Economy from the Perspective of Debt and Exchange Rate

In September of 2022, the newly inaugurated British Prime Minister, Liz Truss, introduced an ambitious policy involving significant tax cuts to stimulate the economy swamped by the COVID-19 pandemic. Regrettably, her ambitious plan eventually led to financial insolvency and catastrophically impacted on the UK's economic growth. Through the rigorous examination and analysis of data, this article primarily attributes her failure to the absence of consumer confidence and the outflow of capital, which were consequences of the substantial currency devaluation caused by the surging government debt. Then, the article draws comparisons between the UK's tax cut and successful case studies from the United States and China, which effectively managed the side effects of expansive tax cuts or similar policies that led to substantial increases in government debt. The findings argue that tax reduction policies cannot yield favorable outcomes unless they are the US with global currency status or in nations like China which can largely eliminate the currency devaluation by a governmental control on exchange rates.

On the Ricardian Equivalence Theorem in the Presence of Banks and a Reserve Requirement

We study the Ricardian Equivalence Theorem in the presence of a reserve requirement. Banks pay depositors the deposit rate and receive the borrowing rate on loans. Equivalence fails because the reserve requirement drives a wedge between the deposit and borrowing rates implying that government faces a different intertemporal tradeoff than savers. A tax cut financed by an increase in government debt causes an increase in savings but only increases the supply of loanable funds by a fraction because of the reserve requirement. This causes interest rates to rise and consumption to fall. We also show that if the central bank pays interest on reserves at the borrowing rate, the various rates are equal, however, equivalence still fails. The reason is that future taxes to pay down the debt must be higher for the central bank to pay interest and consumption will fall in response.

The side effects of local government debt: Evidence from urban investment bonds and corporate pollution in China

Local government debt plays a vital role in achieving financial financialization and regional economic growth. However, the environmental side effects of the debt-financed infrastructure development model have received little attention. Using a large panel data of Chinese enterprises from 2007 to 2016, we explored the relationship between local government debt in terms of urban investment bonds and corporate pollution emission. We observe that the increase in local government debt exaggerates the intensity of COD emission, equal to 26% of the average. This pollution-promoting effect remains after a series of robust checks. In heterogeneous analysis, local government debt is more likely to affect enterprises located in coastal areas, from pollution intensive industry, operating in regions with weak fiscal strength and operating in regions with low governance quality. The mechanistic exploration from government environmental governance and financial constraint reveals that the local government debt increases corporate pollution when the local fiscal finance emphasizes economy over environmental governance, which has been alleviated after the central government advocates the construction of an environmentally friendly and resource-saving society; An increase of corporate pollution is also possible when local government debt increases the financing constraints of enterprises. We also unveil the source of corporate pollution, and find that if enterprises do not actively adopt environmental strategies either in terms of “end-of-pipe” or “source prevention”, they choose to emit more to face with the onslaught of local debt. This study uncovers the environmental impacts of government debt, and explores the potential mechanisms, which can help reduce pollution from local government debt and achieve global climate governance.

Research on the Influence of Fiscal Policy on Enterprise Value

Expansionary fiscal policy is an important means for many countries to cope with economic crisis and promote economic development in recent years. The expansion of fiscal policy may lead to the increase of government debt and the expansion of money supply, which will lead to inflation and economic imbalance, and will also have an impact on enterprise value. By selecting A-share listed companies in Shanghai and Shenzhen stock markets from 2013 to 2021 as samples, this paper explores the influence of expansionary fiscal policy on enterprise value and the intermediary role of financing constraints. The research results show that expansionary fiscal policy has a negative impact on enterprise value, and through analyzing the impact of expansionary fiscal policy on enterprise value by alleviating the financing constraints of enterprises, the influence mechanism of fiscal policy on enterprise value is discussed. At the same time, it is found that compared with state-owned enterprises, the expansionary fiscal policies of non-state-owned enterprises will have a more significant impact on enterprise value. This paper is helpful for enterprise decision makers to adjust their financial strategies and business strategies according to this conclusion to avoid potential risks, and also provides reference value for the government to formulate fiscal policies.

Local government debt and firm productivity: Evidence from China

The growth of the Chinese economy has been accompanied by an increasing trend in the size of Chinese government debt in recent years, but corporate yields are falling. We establish a nonlinear causal relationship between the efficiency of local government debt in China calculated by the DEA method at the prefecture level and firm total factor productivity (TFP) to examine the effect of local government debt on firm productivity. Improving local government debt efficiency will improve corporate productivity in the long run, but the short-term effect is opposite. Our study finds that the misallocation of local government debt increases, corporate productivity will decrease. The study explores a possible development path of China's economy: improving the efficiency of debt. There needs to be a reasonable match between efficiency and scale to promote the high-quality development of firms.

Impact of Indias Current Account Deficit and National Debt on Its Foreign Exchange Rate (vs. Us$): A Study of India from 1990-2018

Abstract: The Current Account Deficit and National Debt of a country are two major factors that can impact the foreign exchange rates it has with the currencies of other nations. This study empirically analyses the impact of India’s Current Account Deficit (in million USD) and National Debt (in million USD) on the nation’s Foreign Exchange Rate (vs.US$). The Current Account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest, and dividends. A deficit in the current account shows that the value of the goods and services it imports exceeds the value of the products it exports. In other words, the country requires more foreign currency than it receives through sales of exports, and it supplies more of its owncurrency than foreigners demand for its products. The excess demand for foreign currency lowers the country's exchange rate (exchange rate depreciation). Thus the model presents a negative or inverse relation between Current Account Deficitand its impact on the Foreign Exchange Rate. Government debt is public debt or national debt owned by the central government. A country with increasing government debt is less likely to acquire foreign capital, leadingto inflation. Foreign investors will sell their bonds in the open market if the market predicts government debt within a certain country. As a result, a decrease in the value ofits exchange rate will follow

The Fiscal Impacts of Trade and Investment Treaties

This article examines the extent to which the latest wave of trade and investment treaties has impacted the fiscal stability of the world’s nations. We construct two new measures of trade liberalization based on the importance of a country in the global network of trade and investment treaties, namely the number of trade treaty links and the hub connectedness of a country. This analysis is important since many analyses of the welfare impacts of trade liberalization typically do not consider the impact on the fiscal balances of governments or assume that any loss of tariff revenue would be made up by the imposition of indirect taxes, like a Value Added Tax. Using a cross-country regression analysis, we confirm that trade liberalization has, on average, reduced the amount of tariff revenue collected. Furthermore, trade liberalization is not correlated with an automatic compensation for lost tariff revenue through other taxation measures. We find, in some cases, that trade and investment treaties are correlated with a reduction in total fiscal revenues and an increase in government debt. These results suggest that policymakers need to take the fiscal impacts of trade and investment liberalization into account when making decisions about trade and investment policy.

DYNAMIC RELATIONSHIP BETWEEN ENERGY SUBSIDY AND FISCAL DEFICIT IN INDONESIA

Problem the fiscal deficit still has a bad influence on the increase in government debt every year. So far, the government has tended to withdraw new debt to cover the fiscal deficit.In conditions of negative primary balance, debt withdrawals tend to increase deficits and fiscal failures in the long run. This condition is also exacerbated by the Covid-19 that hit Indonesia. The deficit has exceeded 3 percent of GDP. even though the state finance law is a maximum of 3 percent of GDP. This condition has had a bad influence on people's purchasing power. caused by a decrease in purchasing power of goods and services. In dealing with this condition, the government needs to increase people's purchasing power through price regulation. Energy subsidiesclosely related to fiscal policy and a number of macroeconomic variables such as: inflation, exchange rates and BIR.This study aims to determine the relationship between energy subsidy control and fiscal deficit, in order to obtain an optimal fiscal deficit. Through the control of energy subsidies, the optimal value of the fiscal deficit can be obtained. Subsidy controls also affect the amount of government debt, so that optimal debt is obtained.

Does Political Polarization Lead to a Rise in Government Debt?

: Existing politico-economic theories offer two mutually conflicting predictions on whether an increase in the degree of political polarization entails a rise or a decline in government debt. This article estimates the effect of political polarization on government debt, utilizing panel data of the OECD countries from 1962 to 2015. The empirical analysis finds that an increase in the degree of political polarization leads to an increase in government debt, which provides supportive evidence for Alesina and Tabellini (1990) and the like. This finding remains the same across different estimation models, without and with instrumenting the explanatory variable of political polarization.

Ambivalent Change in CDS Spreads in 11 Euro Area Countries

One of the macroeconomic consequences of the COVID-19 epidemic is that the global economy has seen a robust increase in the countries‘ gross external debt and the sovereign public debt that is part of it. Nor have the eurozone Member States escaped this effect. The increase in gross external debt and sovereign government debt also means that it has become theoretically more risky for investors to buy debt securities (typically bonds). Theoretically, however, it follows that as a result of the increase in risks in the country, CDS spreads had to rise as well. The study uses a correlation calculation to show that the development of the price of CDSs is more closely correlated with gross government debt than with gross external debt. Using hierarchical cluster analysis, the study groups the countries of the Eurozone. The basis for clustering is the close relationship between a country‘s gross government debt and its CDS spread over the period under review. A relevant conclusion of the study is that the increase in gross government debt was not followed by an increase in CDS spreads because the financial source of the increase in government debt was different from previous years.

The Side Effects of Safe Asset Creation

Abstract We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safe assets causes the zero lower bound (ZLB) to bind, increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. However, this entails permanently lower investment, which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt until the ZLB no longer binds raises welfare when alternative instruments are unavailable. Higher inflation targets instead allow for negative real interest rates and achieve full employment without reducing investment.

Optimal fiscal policy with low interest rates for government debt

This paper analyzes optimal fiscal policy when the rate at which governments can borrow changes persistently. To analyze trade-offs, we allow for fiscal distortions and productive government spending and characterize the optimal mix between spending and revenue measures in a low rate environment. We find that low interest rates on government bonds can be welfare-enhancing if used by the government for fiscal measures that reduce the level of distortion, notably the labor tax, permanently. In the case of a general "flight-to-quality”, where households ask for a premium for holding physical (private) capital, the optimal policy is to increase the public-to-private capital ratio for as long as the shock persists. The associated financing needs should be met by a small increase in government debt and a temporary capital tax.

The Relationship Between Increased Debt Ratio and Economic Growth in the European Union: The Granger Causality Approach

Increased government debt rates in recent years can be easily financed in the current global economic environment characterised by liquidity abundance. Nevertheless, the debt ratios represent a potential threat under the surface, which could lead to significant macroeconomic problems in the future. The purpose of the paper is to contribute to the debate in the empirical studies between public debt and economic growth, as well as external debt and economic growth. During the analyses, the relationship between variables was examined using the panel Granger causality test with the Dumitrescu–Hurlin test in the Member States of the European Union. The main findings of the study are that there is a unidirectional causal effect between public debt and economic growth, that is, only debt impacts on the economic growth. In case of external debt and economic growth there is also a unidirectional effect, but it is in the reverse direction. In addition, the pre-crisis and post-crisis period was also examined, on the basis of which it can be concluded that before the crisis, the nature of the relationship was bidirectional between public debt and economic growth, whereas after the crisis the debt had an impact on the economy growth, and the reverse effect does not exist.

Impact of Government Debt and Foreign Investment on the Indonesian Economy: An ARDL Model Analysis

This study aims to obtain empirical evidence of the effect of government debt, foreign investment on Indonesia's economic growth. A number of macroeconomic variables are used to explain the influence between variables in both the short and long term. The short-term effect is explained through the ARDL model, while the long-term effect is explained through the Long Run Bounds Test. From the ARDL model, it shows that government debt, inflation, exchange rates and the BI rate have a negative and significant effect on economic growth. Meanwhile, foreign investment has a positive and significant effect on economic growth. The results of the Long Run Bounds Test, in the long run, the increase in government debt and foreign investment does not have a significant effect on economic growth. Meanwhile, inflation and exchange rates have a negative and significant effect on economic growth. Unlike the case with the BI rate which has a positive and significant impact on economic growth. The increase in government debt in the long term has an impact on the decline in output and public consumption. This is the impact of an increase in the tax burden in the future.

Assessment of Vietnam’s public debt in the current period

The article is based on secondary data collected from the Financial Statistical Yearbook of the Ministry of Finance and utilizes descriptive statistical methods to assess the current state of Vietnam's public debt in the current period on three aspects consisting of government debt, governmentguaranteed debt, and local government debt. On that basis, the author employs indicators to evaluate the level of the public debt of Vietnam over the period 2006-2019, and assesses the sustainability and safety of Vietnam's public debt compared to those of other countries in the ASEAN region. Research results show that although public debt in Vietnam is still within the allowable ceiling, it has shown signs of increasing in recent years, and the Government has failed to reach the target of maintaining government debt at less than 50%/GDP. The main reason for the increase in government debt stems from the budget deficit, inefficient public spending and public investment, causing loss and waste of investment capital, putting Vietnam into a double deficit of high public budget deficit and spending deficit in recent years. More importantly, the public debt ratio of Vietnam is also relatively high compared to other countries in the ASEAN region, indicating that public debt is posing potential risks to the economy. On that basis, the article also analyzes the causes of high public debt, from which a number of recommendations are proposed to help control the issue in Vietnam.

Managing Fiscal Risks from National Airlines in Pacific Island Countries

Pacific island countries (PICs) rely on national airlines for connectivity, trade, and tourism. These airlines are being struck hard by COVID-19. Losses will weigh on public sector balance sheets and pose risks to economic recovery. With a backdrop of tight fiscal space and increasing government debt, losses in airlines are adding to fiscal risks in some PICs. This paper discusses tools to evaluate and manage the fiscal risks from national airlines in the Pacific. We present a snapshot of the current state of Public Financial Management (PFM) practices in PICs and detail the best practices. This exercise would illustrate the areas in which PICs have scope to improve their risk management with regard to national airlines. We then discuss the use of diagnostic tools and capacity development to enhance monitoring and risk management. Greater transparency and accountability in the airlines, combined with rigorous oversight, would be the first step towards improved financial management of national airlines.

Can Monetary Policy Create Fiscal Capacity?

Governments around the world have gone on a massive fiscal expansion in response to the Covid crisis, increasing government debt to levels not seen in 75 years. How will this debt be repaid? What role do conventional and unconventional monetary policy play? We investigate debt sustainability in a New Keynesian model with an intermediary sector, realistic fiscal and monetary policy, endogenous convenience yields, and substantial risk premia. During an economic crisis of the same magnitude as the 2020 Covid recession, increased government spending and lower tax revenue lead to a large rise in government debt and raise the risk of future tax increases. We find that quantitative easing (QE) and a higher inflation target contribute to lowering the debt/GDP ratio and reducing the risk of future tax increases. QE is state- and duration-dependent: while a temporary QE policy deployed in a crisis stimulates aggregate demand, permanent QE crowds out investment and lowers long-run output.