Private Sector Debt Research Articles

Capital flow freezes

AbstractThe period following the 2008 financial crisis focused attention on “twin-crises,” where banking crises precipitate sovereign crises due to increased bank support. We show that when private sector debt is renegotiated centrally, and bargaining power is low, it results in suboptimally low levels of debt and default rates (haircuts). If, instead, the bargaining power is sufficiently high, the supply of debt exceeds its demand and capital inflows “freeze”. These inefficiencies arise because the decentralized borrowers fail to consider how their bond supply impacts debt renegotiation outcomes, affecting both bond prices and the asset span. These issues can be addressed through macroprudential policies in the form of taxing capital inflows.

Private sector debt overhang and government spending multipliers: Not all debts are alike

This study empirically examines whether government spending multipliers vary depending on the level of debt in the private sector by estimating an interacted panel vector autoregressive model (IPVAR) with unbalanced panel data from 29 OECD countries. Results reveal that (i) government spending multipliers become larger in private debt overhang; (ii) and not all debts are alike: empirical evidence on the larger multipliers in household debt overhang are mixed, while the larger multipliers in firm debt overhang are clear; (iii) in firm debt overhang, positive government spending strongly crowds in both private consumption and investment compared comparing with low firm debt periods, and the multipliers are larger than one; and (iv) in household debt overhang, those crowding-in effects, particularly the effects on private consumption, are not as strong. I investigate various private debt-dependent transmission channels of government spending, including the labor and financial markets. Differences in the behavior of the labor market and investment decision across firm debt overhang and household debt overhang may be important for understanding the empirical results.

The relationship between external debt and growth under the structural breaks in Turkey

This study aims to investigate whether Turkey's external debt (by considering the debt maturity and ownership separately) has a relationship with economic growth and to explain the direction and size of these effects in case of their existence. At the same time, the relationship between consumption and investment, which are sub-items of growth, and external debt are also discussed. The data subject to the analysis in the study consists of gross domestic product and external debt data provided by the Central Bank of the Republic of Turkey Electronic Data Distribution System and covering the 1998Q1 and 2021Q4 periods. In this study, econometric methods, including both conventional and structural breaks, were used. According to the results, both short-term and long-term external debt significantly and positively affect gross domestic product, consumption and investment. In addition to this situation, it is seen that the effect of long-term external debts is more. However, it is also concluded that the effect of long-term external debt is greater. When evaluated separately on a sectoral basis, it is concluded that the significant and positive relationship between public sector external debt and economic growth and its sub-items is valid both in the short and long term. When the effect of external debt on investments is analyzed, it is seen that the effect of long-term external debt is more than short-term debt. The most important point to note here is that short-term private sector debt, which does not affect gross domestic product and consumption, has a significant effect on investment and is about three times the public sector short-term debt.

Debt component of financial stability

Subject. The article considers the debt burden of countries and institutional units within them as part of financial stability. Objectives. The purpose is to analyze the conditions and to trace long-term historical trends in the debt of non-financial sector as a factor of financial stability in relation to some developed and developing nations. Methods. The study rests on the review of counter-positions of various authors on the subject, the cross-country comparative analysis, cluster analysis, trend analysis, and the graphical method. Results. The paper offers a systematization of types of debt of institutional sectors, discloses theoretical foundations of debt analysis as a factor of financial stability, reveals long-term trends in non-financial sector’ debt, based on the Bank for International Settlements data covering information on 31 advanced economies and 13 emerging markets. Conclusions. The findings can be used by the Ministry of Finance and the Bank of Russia, when developing fiscal and monetary policy strategies and tools aimed at ensuring conditions for financial stability. The paper identifies countries with leverage (including public debt and private sector debt) exceeding critical thresholds in terms of constraints on economic growth and financial stability.

Impact of Treasury Bill on Private Sector Credit in Nigeria

In this study, the effect of treasury bills on private sector credit in Nigeria using annual data from 1981 to 2018 was examined. The specific objectives of the study were to examine the impact of treasury bills and treasury bill rate on private credit. Treasury bills was disaggregated into its various components and used as explanatory variables along with other essential macroeconomic variables. The study was conducted in the light of the crowding out effect hypothesis. The behavior of variables was captured in an autoregressive distributed lag (ARDL) model. The result of the estimated model shows that treasury bills held by commercial banks, treasury bills held by the public and treasury bill rate has significant negative effect on credit to private sector, showing that treasury bills have a crowding out effect on private sector credit. It is recommended that treasury bill rate should be set to align with other rate of return on short term financial asset in the financial system to allow for fair competition between public sector and private sector debt instrument and thus limit the crowding out effect and that the issuing of treasury bills should be justified with the existence of excess liquidity in the financial system.

Leading indicators of debt pressure: a South African application

As South Africa’s national debt has been on a steady upward trend since the late 2000s, this paper aims to construct an Early Warning System (EWS) using logit regressions to predict the likelihood of future public sector and private sector debt pressure. Results show that real GDP growth and the exchange rate matter for the prediction of private sector debt pressure. Government expenditure and real GDP growth are the most important predictors of public sector debt pressure. The implication of the net substantive magnitude of leading indicator impacts is that private debt pressure is principally structural, and public debt pressure is a reflection of discretionary policy choices. Early warnings from all four model predictions satisfy statistical reliability criteria. The best performing model is the public sector model for excessive debt accelerations, capturing 61.54% of the actual high-pressure events with a precision of 72.73%.

The Belt & Road Initiative and the public and private debts of participating countries: The role of China's economic policy uncertainty

This paper investigates the effects of China’s economic policy uncertainty on external debts in countries involved in the Belt & Road Initiative. We first investigate an investment decision model to show heterogeneous effects on public and private debts. We then estimate such effects with recent data using a Propensity Score Matching (PSM)-Difference in Difference (DID) approach. We find that China’s economic policy uncertainty has intermediary effects on the scale of the external debt For the Belt & Road participating countries. We also show that there exists a significant difference in the effects on external public and private debts. The effects of economic policy uncertainty on total external debts in the participating countries are mainly attributable to the effect on the private sector debt rather than the public sector debt.

ПРИВАТНИЙ БОРГ ТА ЕКОНОМІЧНЕ ЗРОСТАННЯ: ТРЕНДИ ТА ХАРАКТЕРИСТИКИ В УКРАЇНІ

Purpose. The purpose of the article is to determine the effects on economic activity of a pure temporary change in private debt and the relationship between the debt multiplier and the level of economic growth in Ukraine. Design/methodology/approach. In the article, the authors used the function of exponential growth for determining the GDP sensibility to the debt movements. There are also using the Granger approach for determining the direction of the relation between private debt and GPD. Rather than testing whether private debt causes GDP, the Granger causality has tested whether private debt forecasts GDP. The authors provided the calculation in the direct and indirect methods. The model of the direct method was based on the assumption that the GDP growth in the current period depends on the dynamics of GDP and increase of private debt in the previous period. The model of indirect correlation was based on the assumption that the increase of the amounts of private debt depends on the former dynamics of GDP and the amount of private debt accumulated in the previous period. Findings. The hypothesis that the GDP sensibility to the private debt movements is individual for every economy is proven. The households’ debt to GDP ratio and non-financial firms’ debt to GDP ratio for the conditions of economy of Ukraine is one of the lowest in Europe, which proves the low attractiveness of debt financing of the private sector growth. The authors show that elevated private debt sentiment in year t+3 is associated with a rising in economic activity in year t. Such conclusion is fair as for the sensitivity to the households’ debt movements and so to the firms’ debt movements. The increase in private debt causes the insufficient influence on the GDP increasing, so we cannot consider the debt market growth as a stimulator of the economy growth in Ukraine. The authors showed the existence of a relation between the GDP growth and increase of private debt only in indirect model. Private sector debt cycle more correlated with the business cycles: in the case of GDP growth the private debt rises also. But, the strength of influence of the GDP growth on the private debt growth is temperate: while the increase in the GDP by 1 % in the medium predicts 0.055 % subsequent private debt growth. Practical implications. The debt-growth nexus has received renewed interest among academics and policy makers. The results of this research are of interest to the government in its way of economic reform and generating effective tools to overcome the economic downturn. Also, the findings can help the financial market regulators to realize the effective monetary policy. Originality/value. This study represents a new evidence of relations between private debt and the real economy. In contrast to existing research the authors argued the reality of indirect impact of economical cycles to the private debt dynamic. But, the strength of influence of the GDP growth on the private debt growth is temperate. So it’s wrong to consider the debt market development as a stimulator of the economic growth in Ukraine. In contrast to the developed countries in Ukraine the main part of private debt belongs to firms.

PANDEMI COVID 19 DAN PENGARUHNYA TERHADAP PASAR TENAGA KERJA DI INDONESIA

Pandemic Covid 19 is a crisis that begins with health problems. But the crisis is heading towards an economic crisis. This study examines the impact of the economic crisis using various data from various sources such as Bank Indonesia, Ministry of Finance, World Bank, International Labor Organizations, International Monetary Funds and McKinsey. Based on the data collected, the economic impact on the labor market is analyzed. The results of this study conclude that the high unemployment will create a decrease in demand while the Quantitative Easing policy and private sector debt restructuring from Bank Indonesia is directed to the supply sector. Without the demand for goods and services from consumers, the company will not be able to sell its products and recover as usual. The policy suggested from this study is that the government needs to create manpower and whenever it feels necessary to subsidize the salaries of employees, especially in the national leading sectors.

Effect of Interest Rates on Private Sector Debt in Kenya

This study sought to examine the effect of interest rates on domestic private sector debt in Kenya over the 30 year period from 1990 to 2019. The dependent variable was private sector domestic debt, the independent variable was commercial bank weighted average lending rate while the control variables were annual GDP growth, extended broad money (M3) and annual USD-KES exchange rate. Using the Prais-Winstein estimator model, the regression model findings were commercial bank lending rate had an insignificant relationship with domestic debt at 95% confidence level but significant at 90% level while money supply had a negative and significant relationship with domestic debt. The study noted predominance of the banking sector in the financial sector and identified the need of a well-developed corporate debt market.

Effect of Deepening Finacial Sector on Income Gap in Six Asia Countries 2012-2016

The financial sector has an important role in increasing a country’s economic growth, but the income gap is one of the main problems in economic growth in various countries. The financial sector has a strong influence on economic development, poverty alleviation and economic stability. This study aims to determine the effect of financial sector deepening on income inequality by using panel data from six countries, namely Malaysia, Indonesia, Philippines, Singapore, China and Korea which are divided into two groups, namely lower middle income countries, namely Indonesia and the Philippines and upper middle / high income, namely Malaysia, Singapore, China and Korea in 2012-2016. By using the Panel Least Squares analysis technique, this study found results that were upper middle / high income; bank assets, money supply, stock traded have a positive effect; lending to the private sector; domestic money bank assets, private sector debt securities and stock market capitalization have a negative effect. Whereas in lower middle income countries; bank assets, money suply, stock market capitalization have a negative effect; stock traded has a positive effect; however, lending to the private sector, domestic money bank assets, government debt and private sector debt does not affect the income gap.
 
 Keywords: Financial Deepening, Income Gap, Asia

Exchange Rate Private Sector Debt Nexus: Lessons from Turkish Experience

External debt stock of the private sector is increased from 2002 to 2018 in Turkey. In this period, Turkish Lira depreciated against foreign currencies. This study is investigated the relationship between real exchange rate and private sector external debt during the period 2002-2018 in Turkey. Auxiliary variables included in the model are LIBOR, domestic interest rates and real GDP. Application methods of the study are Delayed Distributed Autoregressive Model (ARDL) and Error Correction Model (ECM). Results of the study shows that, respectively domestic interest rate, LIBOR and exchange rate effective variables on the private sector external borrowing in the long term. Beside, exchange rate’s effects on the private sector external debt is higher in the short term than long term. Other hand, there is no relationship between private sector external borrowing and domestic production in the short and long term.

A Partial Jubilee Proposal: Deleveraging Authorities Financed by Zero-Coupon Perpetual Bonds

Debt overhang of the non-financial private sector has been one of the main reasons for the ongoing global stagnation, and recent data released by the International Monetary Fund, International Institute of Finance, United Nations Conference on Trade and Development and others indicate that debt overhang of the non-financial private sector is worse in 2019 than it was in 2007. In light of history, at this level of debt overhang, a global non-financial private sector debt deleveraging is inevitable, if it did not start already. If disorderly, this deleveraging is likely to lead to deep global debt deflation, followed by a deep global recession (and possibly a global depression), thereby creating financial and economic instabilities and further tensions in international relations with dire consequences for emerging and developing countries, not to mention developed countries. Blending the German Currency Reform of 1948 and the 'Modern Debt Jubilee' of Steve Keen, we propose a globally coordinated one-off orderly non-financial debt deleveraging to address this debt overhang. It is a partial debt Jubilee financed by zero-coupon perpetual bonds. Given its focus on the entire non-financial private sector, it is more comprehensive than mechanisms that focus on either only the households or only the firms. Finally, we propose a second mechanism to extend the first to include all sectors because the high debt burdens the world suffers from are neither only private nor only public but both.

Private Sector Debt, Financial Constraints, and the Effects of Monetary Policy: Evidence from the US

AbstractWe characterize the response of U.S. real GDP to monetary policy shocks conditional on the level of private sector debt and the degree to which financial constraints are binding. To incorporate state‐dependent effects of monetary policy, we use the local projection framework. We find that although the amount of private sector debt potentially weakens the monetary policy transmission mechanism, policy shocks exert substantially larger effects on output when high private debt coincides with binding financial constraints.

Global Liquidity, the Private Sector and Debt Sustainability in Sub‐Saharan Africa

ABSTRACTThis article analyses the effect of changes in international financial markets on the debt dynamics in sub‐Saharan Africa in recent years. A key development is the rise of the private sector as both a lender and a borrower in African debt markets, a process that is associated with the growing integration of the region into global financial markets. The article argues that the Debt Sustainability Framework of the International Monetary Fund and World Bank has taken some steps to account for this growth of private sector, cross‐border debt, but such steps still fall short of what is needed. A full appreciation of the importance of private debt implies, first, that debt sustainability in sub‐Saharan Africa be understood in the context of countries’ integration in global financial markets and the global liquidity cycles that characterize those markets and, second, that the interplay between private and public debt be monitored in order to provide a fuller picture of the impact of private sector debt on fiscal sustainability.

The Limit of Evil: Effects of Inflation and Public Debt on Capital Market Development

It is almost self-evident that capital markets can thrive only in a benign macroeconomic environment. What is often overlooked is that malign macro factors such as inflation and government debt, provided that they are kept under control, can have their bright sides. Previous studies typically presume that the impact of inflation or government debt on capital market development is monotonic, thus precluding the possibility that these factors could be beneficial within a certain limit or threshold. In this study, we take into account this possibility. Our study finds an inverted U-shaped relationship between inflation and the size of the stock market. Hence, inflation within a certain limit may act as a lubricant to the market and help lower the cost of capital in real terms. However, when inflation is too high, long-term investment decisions would be difficult, which is detrimental to stock market growth. An inverted U-shaped relationship is also found between the size of the government bond market and that of the corporate bond market. This suggests that public debt under a certain threshold can benefit corporate bond market development, supporting the notion that the sovereign yield curve plays an important role in pricing private sector debt securities. However, excessive public debt would stifle it.

ЕАБР Макрообзор, Август 2018. Страны ЕАБР: курс на устойчивое развитие (EDB Macroreview, August 2018. EDB Economies: A Course for Sustainable Development)

ЕАБР Макрообзор, Август 2018. Страны ЕАБР: курс на устойчивое развитие (EDB Macroreview, August 2018. EDB Economies: A Course for Sustainable Development)

Insolvency frameworks and private debt: an empirical investigation

This paper presents new evidence on the importance of insolvency frameworks for private sector debt deleveraging and for the resolution of non-performing loans (NPL). We construct an aggregate insolvency framework index (IFI), which is used as explanatory variable in the empirical analysis. By means of panel estimates over 2003-2016, we show that OECD countries with better IFI deleverage faster and adjust their NPL levels more rapidly than countries with worse IFI. We also show that there is a strong correlation between the level of NPL and IFI, which appears to be state-dependent, i.e. in a situation of high unemployment relative to its historical average the NPL ratio is generally lower for a higher IFI. Finally, our results indicate that better insolvency frameworks lead to faster NPL reductions and to lower NPL increases during economic bad times. JEL Classification: C23, E02, E05, O52

Contingent Convertible Bonds in a General Equilibrium Model

This contribution discusses bail-in instruments in a general equilibrium model with a continuum of banks and households. We show that if banks are already endowed with bail-in securities, they are effective in mitigating debt overhang and increase household financial wealth. However, a pure private sector debt restructuring is not sustainable and needs public sector intervention. If a bail-in program is implemented it creates incentives for high default probability banks to invest. In comparison to other interventions such as an asset purchase program, implementing a bail-in program induces larger redistributions and therefore potentially larger social costs.

External debt and monetary policy autonomy

During a time of rising world interest rates, the central bank of a small open economy may be motivated to increase its own interest rate to keep from suffering a destabilizing outflow of capital and depreciation in the exchange rate. Empirically, this paper shows that this is especially true for a small open economy with a current account deficit, which relies on foreign capital inflows to finance this deficit. In addition, the method of current account financing has a large effect on whether or not the central bank will opt for exchange rate and capital flow stabilization during a time of rising world interest rates. A current account deficit financed mainly through reserve depletion or the accumulation of private sector debt will cause the central bank to pursue de facto exchange rate stabilization, whereas a current account deficit financed through equity or FDI will not. Quantitatively, reserve depletion of about 7% of GDP will motivate the central bank with a floating currency to adjust its interest rate in line with the foreign interest rate to where it appears that the central bank has an exchange rate peg.