Value Of Government Debt Research Articles

The application of different term-structure models to estimate South African real spot rate curve

The purpose of this study is to investigate the suitable arbitrage-free term-structure model that might be able to fit the South African inflation-indexed spot-rate curve. The instrument has relatively less tradability in the market, which then translates into a lack of adequate data for bond valuation/pricing. Pricing deviations might give inflated/deflated projections on the value of government debt; consequently, higher estimated interest cost to be paid. A proper valuation of these instruments is mandatory as they form part of government funding/borrowing and the country’s budgeting processes in the medium term. The performance of newly developed non-linear multifactor models that follows the Nelson-Siegel (1987) framework was compared to the arbitrage-free Vasicek (1977) model and linear parametric models to assess any significant deviations in forecasting the real spot-rate curve over a short period. Models with constant parameters (i.e. linear parametric, cubic splines, Nelson-Siegel (1987) and Svensson (1994)) gave a perfect fit, they proved to marginally lose fitting capabilities during periods of higher volatility. Therefore, it could be concluded that the application of either Nelson-Siegel (1987) model or Svensson (1994) model on forecasting South African real spot-rate curve gave a perfect fit. However, for a solid conclusion to be derived, it is imperative to explore the performance of these models over a period of stressed market and economic conditions.

Fiscal Risks and Currency Returns

I develop a model of real exchange rate determination that attributes a central role to the intertemporal government budget condition, which equates the market value of government debt to the present value of government surpluses. To enforce this equilibrium condition in the presence of nominal rigidities, the real exchange rate has to adjust in response to shocks to government surpluses. The model predicts that fiscal shocks account for real exchange rate movements, and the factor structure in fiscal shocks aligns with the factor structure in currency returns. Both predictions are confirmed in the sample of developed countries.

Stepping on a Rake: Replication and Diagnosis

This paper replicates Sims (2011) “stepping on a rake” model. It derives the model, shows how to solve it, offers some extensions, and boils the paper down to its central ingredient. Sims’ article is important: it is a simple modern economic model that produces a temporary decline in inflation when the central bank persistently raises interest rates. Inflation then rises. The model’s essential feature is long term debt. When interest rates increase, the nominal market value of long-term government debt falls. If fiscal surpluses are unchanged, the price level must fall so that the real value of government debt matches the unchanged real present value of surpluses. The model offers a unified treatment of interest rate targets, quantitative easing and forward guidance that works even in a frictionless setup.

Inflation and the Impact of Budgets

This article focuses on the adjustment of budget figures for the effect of inflation on the value of government debt. It asks whether such adjustment improves their performance as a measure of ‘fiscal impact’. If inflation significantly influences the impact of budgets on the real economy, policy-makers may make inappropriate fiscal policy decisions if they are guided by unadjusted budget figures. The article argues that if agents perceive holdings of government debt as part of their wealth, changes in the real value of debt will have an effect on consumption behaviour. Therefore to assess the impact of fiscal policy on consumption it may be necessary to adjust budget figures so that they accurately indicate changes in the real value of debt held by the private sector. This article adjusts a series of structural public sector borrowing requirements (PSBR) for the effect of inflation on the real value of government debt held by the private sector. An empirical analysis concludes that the inflation-adjusted budget series provides a superior measure of fiscal impact on consumption, and hence the real economy.

A Fiscal Theory of Currency Crises

An exchange rate crisis is caused when the fiscal authority lets the present value of primary surpluses, inclusive of seigniorage, deviate from the value of government debt at the pegged exchange rate. In the absence of long‐term government bonds, the exchange rate collapse must be instantaneous. With long‐term government bonds, the collapse can be delayed at the discretion of the monetary authority. Fiscal policy is responsible for the inevitability of a crisis, while monetary policy determines its characteristics, that is, the timing of the crisis and the magnitude of exchange rate depreciation.

An empirical test of the effects of government deficits on money demand

There is a great deal of interest in how govenment deficits affect macroeconomic variables. Accordingly, there is a large body of theoretical and empirical work on the topic. This paper examines the relationship between deficits and interest rates. Among the difficulties in exploring this relationship is that when conducting monetary policy, the Federal Reserve often targets interest rates. Such a policy can cloud any relationship between deficits and interest rates. A way to avoid this problem (among others) is to estimate money demand functions that contain a measure of the market value of government debt. No evidence is found to support a positive relationship between government debt and money demand. This finding implies budget deficits do not affect interest rates through money demand.

OPTIMAL PRE-COMMITMENT IN MACROECONOMIC POLICY: A GAME THEORETIC ANALYSIS OF FISCAL POLICY

The version of the paper published in Oxford Economic Papers (Volume 42, October 1990, pp. 695–714) erroneously omitted the figures. This note presents the figures and briefly describes the results they show. The paper proposed a new solution to the problem of time inconsistency. A subgame-perfect trigger strategy equilibrium was presented in which the public expected the government to renege on its originally announced policy at some later date. The government's pre-commitment to its announced policy was determined endogenously as part of the equilibrium. The equilibrium was illustrated using Blanchard's (1985) model of fiscal policy. I examined the [political] problem of maintaining aggregate consumption while reducing the level of government debt. The problem of time inconsistency arises in this context because the government has an incentive to renege on its promise to raise future taxes. Numerical solutions of the model showed that the government would renege after a period that depended on its expected tenure and preferences. Figures 1 to 4 show the behavior of the economy under policies with no pre-commitment ([ t0t* ) = 0), a moderate period of precommitment ([ t0t* ) = 33.5), and a long period of pre-commitment ([ t0t* ) = 140.2). Figure 1 shows that governments with greater credibility will prefer to push the costs of falling consumption further into the future. This is achieved by adopting policies that promise to raise future revenues while cutting current taxes so that the fall in the value of government debt is offset by the rise in human wealth [see Figures 2 and 4]. One important consequence of these policies is that the level of government debt rises during much of the period of pre-commitment. Figure 5 is used in the appendix to prove proposition 1