In Japan, as in other countries, the recession caused by the subprime loan crisis has reduced tax revenues and necessitated additional government expenditures. Meanwhile, debt crises in Greece, Ireland, and Portugal have focused on financial reform in the EU. Japan’s ratio of central and local governmentdebt to GDP is relatively high compared to other OECD countries (Figure 1), and national financial reform has become a major debate in Japan. Furthermore, fiscal problems among municipalities and prefectures have been a topic of sustained discus- sion in Japan. In Kochi Prefecture in July 2004, the Prefectural Governor Daijiro Hashimoto declared a financial crisis during an address to the regular prefectural assembly and asserted that Kochi would face fiscal reconstruc- tion in 2007 if conditions remained unchanged. In March 2007, the designated organization for fiscal secondary reconstruction in Yubari City, Hokkaido, highlighted the increased need to reform finances. More recently, it was said that Okayama and Miyagi Prefectures would be organized for fiscal reconstruction until 2011 in 2008 1 . Given these discussions, it is timely to consider the fiscal sustainability of Japan’s prefectural governments.
After the oil-crisis in the first half of the 1970s, and also after the financial crisis starting at the end of 2008, there have been periods with low, and even negative economic growth, and also some periods with high interest rates. As a result, the development of public debt has been a huge problem for many countries. Because of this economists have been more interested in the problem of governmentdebt and have started to study it more carefully.
Moreover, he finds that the debt/GDP ratio that maximizes overall welfare is positive, which confirms our results that the costs of debt reductions over the transition are large. In this project, we show that inequality is the important driver of the welfare effects of governmentdebt, both in the transition as well as in stationary equilibrium. Ludwig and Kr¨ uger (2013) compute the optimal tax progressivity and education subsidies in a model with endogenous human capital formation. Heathcote (2005) analyses the impact of tax changes on aggregate consumption. Gomes, Michaelides, and Polkovnichenko (2013) quantify the crowding out effect on the capital stock of a 10 percent increase in governmentdebt in an incomplete market economy with aggregate risk. Angeletos and Panousi (2009) and Challe and Ragot (2010) study the effects of changes in government expenditures in incomplete market models. Oh and Reis (2012) study the impact of government transfers. Gomes, Michaelides, and Polkovnichenko (2012) aim at quantifying the fiscal costs of the recent financial crisis in US. Desbonnet and Weitzenblum (2011) and Azzimonti, de Francisco, and Quadrini (2012) also exploit the fact that governmentdebt facilitates self-insurance, as we do in our work. The explicit characterization of the welfare consequences of debt reductions during transition and in stationary state is not the main objective of any of the aforementioned papers.
My government bond data base is complemented by government-level data on macroeconomic conditions from Datastream and Bloomberg at quarterly, or yearly frequency. These variables are the government’s debt/GDP ratio, the total change in the debt/GDP ratio in the previous four quarters, total real GDP growth dur- ing the previous four quarters, the countries consumer price inflation (CPI) during the prior year, a recession dummy computed based on two subsequent quarters of negative GDP growth, and a non-investment grade rating dummy based on S&P’s long-term local currency government rating. In addition, I complement the dataset with data on credit market conditions from Bloomberg at the quarterly, or daily frequency. These credit market condition measures are the term structure measured as the yield differential between 10-year and 6-month governmentdebt, the yield level as measured by the governments’ 6-month yield, and the yield spread of 10-year governmentdebt securities to 10-year German bunds. For the cross-sectional analy- sis, I also collect data on a countries size as measured by its GDP, and governments’ budget deficit at quarterly, respectively yearly frequency. To examine gap-filling behavior, my measure for the supply of aggregated Eurozone long-term governmentdebt is the log of the aggregated deal amounts (converted to euro) of Eurozone governmentdebt issuances with maturities above ten years (hereafter AMT10).
The intuition behindour result is simple. Suppose that the interest rate is 0. Private agents do not care whether the government sets a 30% tax on current labor income to be paidnow, or a 15% tax to be paidnow andan additional 15% tax that is based on today’s income, but can be paid in the future. While the path of governmentdebt can be changedthrough such a choice, only the present value of taxes matters for real allocations. For this argument to apply, it is important that households have correct anticipations about the possibly state-contingent future government policy andthat they are able to borrow andsave at the market interest rate.
The use of public debt has important economic consequences that extend beyond the comparative metrics presented in this report. Economists examine broader issues surrounding governmentdebt and its impact on the financial markets and the economy. These issues, which are not mutually exclusive, include (1) the degree to which governmentdebt crowds out domestic investment and net exports and (2) the economic efficiency of using tax-exempt debt to subsidize public capital formation. The two chiefly negative consequences may seem to justify greater oversight of state and local governmentdebt and the implicit federal subsidy. Designing a federal oversight role, however, would need to address the underlying constitutional issues governing the federal-state relationship.
How do di¤erent levels of governmentdebt a¤ect the optimal con- duct of monetary and …scal policies? And what do these optimal poli- cies imply for the evolution of governmentdebt over time? To provide an answer, this paper studies a standard monetary policy model with nominal rigidities and monopolistic competition and adds to it a …scal authority that issues nominal non-state contingent debt, levies distor- tionary labor income taxes and determines the level of public goods provision. Higher governmentdebt levels make it optimal to reduce public spending, so as to dampen the adverse incentive e¤ects of dis- tortionary taxes, but also strongly in‡uence the optimal stabilization response following technology shocks. In particular, higher debt levels give rise to larger risks to the …scal budget and to tax rates. This makes it optimal to reduce governmentdebt over time. The optimal speed of debt reduction is missed when using …rst order approximations to optimal policies, but is shown to be quantitatively signi…cant in a sec- ond order approximation, especially when technology movements are largely unpredictable in nature.
First, Hosono and Sakuragawa  examine using the dynamic stochastic general equilibrium (DSGE) model, which shows that the current primary deficit turns to a surplus in 10 years and increases up to 2.2% surplus of GDP so that the governmentdebt-to-GDP ratio becomes sustainable. Second, Arai and Nakazawa  apply Chalk’s  overlapping generations (OLG) model. They calculate the level of primary balance ratio to GDP that converges the governmentdebt-to-GDP ratio into some finite level under a certain assumption of economic growth. They show that the government should maintain the primary surplus at 13.8% - 18.7% of GDP to make the government budget sustainable, but the pri- mary deficit-to-GDP ratio reaches nearly 8% in effect. Finally, Arai and Ueda  predict the size of economic growth to keep the government budget sus- tainable by applying Chalk’s  model. They show that the primary deficit may be unsustainable unless the economic growth rate is more than 5%, an unrealis- tic figure in contrast to Japan’s growth rate in these two decades, according to their setting.
The reason for this is as follows. In an economy with meaningful fiscal policy and with access to taxation as an instrument (in combination with the monetary instrument), the joint monetary and fiscal policy under commitment can deal effectively with both technology and cost-push shocks without generating significant unwanted inflation. As a result, although the optimal commitment policy does not perfectly control the price level, the extent of price level drift is small. Under discretion, the presence of nominal governmentdebt gives rise to a substantial ‘debt stabilization bias’, which depends upon both the level and maturity of governmentdebt (Leeper and Leith, 2016) as policy makers face the temptation to inflate away any shock-induced fluctuations in debt. Economic agents anticipate this and inflation expectations (and inflation itself) rise until the temptation is removed. This implies a far larger amount of price level drift under discretion. Delegating a nominal income or, more effectively, price-level target to the monetary authority, can improve on this significantly, with welfare gains amounting, under our calibration, to around 0.53% of steady-state consumption that the consumer would be willing to give up to move from the actual regime to the steady-state allocation in the case of a relatively high debt economy like Italy.
from additional insurance are the consumption-poor, which also suffer the most from a decline in wages. Our result suggests that the negative impact governmentdebt has on welfare via efficiency losses and the income composition channel overrides the positive effect of additional insurance. Our conclusion that the government should optimally provide additional capital as a means of production instead of issuing debt stands thus in contrast to the view of Aiyagari (1995). In this seminal contribution, he emphasizes that the precautionary saving motive present in incomplete markets economies leads to an overaccumulation of capital compared to the complete market benchmark, suggesting that any government policy that reduces capital could be welfare improving. However, if one takes the fact that markets are incomplete as given, as we do here, a social planner could improve welfare by providing additional private capital. In this sense our finding is in line with the recent contributions of Davila et al. (2007) and Gottardi, Kajii, and Nakajima (2010). Both papers find that competitive equilibrium allocation of resources is constrained inefficient, and that there is in fact an underaccumulation of capital. Our paper contributes to this literature by showing that a benevolent government can increase aggregate welfare by accumulating assets and buying private bonds. This policy can - at least partly - make up for the underaccumulation of assets in the private sector.
Nicola Fuchs-Sch¨ undeln, Wouter den Haan, John Hassler, Marcus Hagedorn, Jonathan Heathcote, Kenneth Judd, Leo Kaas, Timothy Kehoe, Nobuhiro Kiyotaki, Felix K¨ ubler, Alex Michaelides, Dirk Niepelt, V´ıctor R´ıos-Rull, Karl Schmed- ders, Kjetil Storesletten, Iv´ an Werning, Fabrizio Zilibotti, as well as participants of various seminars, in particular the SED 2014 in Toronto, for many useful suggestions. We particularly benefited from the input by Laura Zwyssig. R¨ ohrs would like to thank the University of Zurich for financial support (Forschungskredit Nr. 53210601). Winter gratefully acknowledges financial support from the European Research Council (ERC Advanced Grant IPCDP-229883) and the Na- tional Centre of Competence in Research ”Financial Valuation and Risk Management” (NCCR FINRISK). All remaining errors are our own. Parts of this project were previously circulated under the title Wealth Inequality and the Optimal Level of GovernmentDebt. This paper represents the authors’ personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank.
The choice of the subject of this paper: the refinancing of local governmentdebt, was deter- mined by the conviction that this field of research has not yet been sufficiently explored. The lit- erature downplays this issue at the regional and local level. Thus the main aim of this work is the systematisation of information on the refinancing of public debt, including local governmentdebt, and examination of the scale of this phenomenon (existing) throughout Polish municipalities. Debt indicators have been proposed to add to the array of tools used for assessing the financial condition of local governments so that the objectives defined in the paper have both a theoretical as well as a practical application. Problems and difficulties associated with the measurement of public debt have been identified, the concept of debt refinancing explained in more detail and reference has been made of (a) public debt in relation to (the) local governmentdebt. Issues indi- cated in the article relate to debt restructuring and are sometimes confused with refinancing. The refinancing of Polish municipalities in the years 2003–2015 has been presented, followed by some proposals for measures applicable to the issues under discussion. The paper ends with a summary containing the main findings, and indicates issues that still require further research.
At present, the research on quota management in China is not enough, most of them stay in the stage of theoretical analysis, Yingqiu Liu  through the empir- ical analysis of the EU, concluded that the full equilibrium deficit rate is 3.5%, the maximum limit is 5.5%, and the full equilibrium debt rate should be 30% - 35% as the control target, with a ceiling of 58%. Weitao Diao  estimates the general debt limit and the special debt limit in local governmentdebt through the portion of local government fund income and local public revenue, and he believes that the current debt of local governments with repayment responsibili- ties has exceeded the sum of the limits of general debt and earmarked debt, It is therefore necessary to reduce the size of the debt by disposing of government assets, to ensure the rigid implementation of the debt limit after the implemen- tation of the “new rules” of local debt. Entao Ma  analyzes the necessity, ex- isting problems and quota index of current debt limit management in China, puts forward the direction to be considered in the design of the debt limit index, and sets the debt balance, the debt burden rate, the debt rate, the gold rule, the debt rate in the area of infrastructure construction and other 6 indicators. In the empirical analysis, Fan Zhong  measured the risk and performance of local governmentdebt, divided the country into a comprehensive risk of higher, high performance of the region; higher comprehensive risk, Use of areas with lower performance; combination of lower risk and higher performance in areas; lower combined risk and lower performance. Feng Wang  using the ZSG-DEA models, calculates the efficiency of the use of local governmentdebt in various provinces of the country, and distributes the limits of local governmentdebt in provincial and municipal governments under the principle of optimal efficiency and total quantity.
The composition of governmentdebt in terms of maturity, indexation, currency and investor base infl uences both a government’s costs and the risks related to the rollover of outstanding governmentdebt. A government, or its appointed agency, typically known as the debt management offi ce, tries to minimise the costs in view of the risks related to the issuance of governmentdebt. In this respect, it is guided by the debt management strategy, which explicitly sets out the government’s medium-term objectives for managing its debt. In addition, the focus may be on certain targets, such as the development of the sovereign bond market (e.g. by increasing the liquidity of certain market segments, re-opening government benchmark bonds, issuing governmentdebt in maturities which match the demands of investors, or were absent and so complicated the construction of the yield curve) or on avoiding any accumulation of issuance activity by more issuers within the same period. There are several macroeconomic reasons for attaching importance to the composition of governmentdebt. First, particularly in developed economies, the government bond yield curve serves as a benchmark for pricing private sector bonds. The maturity composition of governmentdebt affects the yield curve and hence the fi nancing conditions of the private sector, with possible effects on overall economic activity. Higher government borrowing under certain conditions (see, for example, Buiter et al., 1985) crowds out possible private sector borrowings that are crucial for long-term economic growth. Second, with a high share of short-term debt the government may be vulnerable to increases in monetary policy rates. If a government has to take fi scal measures to counteract the effect of higher interest expenditure on the overall budget balance, this may have a negative impact on economic activity. The government may then have an incentive to put pressure on the central bank to maintain low policy rates. Third, Wolswijk and de Haan (2005) claim that issuing infl ation-indexed bonds may reduce the incentives for governments to put pressure on
currency denominated debt in times of need. Needless to say, such liberties cannot be taken with respect to sover- eign debt, making the likelihood of default appreciably higher. To delve into this issue empirically, we collect new data from the World Development Indicators data- base and construct the External_Debt variable, which divides the external public debt stocks by GDP. By regarding all non-external debt as domestic, we further create a Domestic_Debt variable, which is likewise scaled by GDP. Both of these indicators, in their first-differenced from, are entered into our return regression (see Specifi- cation (2) in Table 7). Although increases in both types of governmentdebt significantly depress stock valuations, their impact is not homogeneous. As anticipated, the det- rimental impact of foreign debt is more severe, which is evidenced by the significantly higher regression coeffi- cient (p-value = .0089). Some caution is advised when interpreting these results, as the data used for this estima- tion were available only for 17 countries. Nevertheless, governments that consider equity investors to be an
1999 y 2002; Álvarez and Salinas, 2002 y 2003). In Escudero and Prior (2002) the local governmentdebt and its control in 1995 and 1996 are analysed. Their results confirm that decentralized local governments have higher levels of consolidated debt. Also, in Escudero and Prior (2003), the effects of political cycles are studied for the period 1998 to 1999. Their results show that the year previous elections, local spending is higher. Other empirical studies are González-Páramo (1995), Férnandez (2003), Cabases et al. (2003), Heins (1963), Mitchell (1967), McEachern (1978), Epple and Spatt (1986), Bayoumi and Eichengreen (1994 and 1995), Dafflon (1996), Bennet and Dilorenzo (1982), Blewet (1984), Bunch (1991), Von Hagen (1991) Farnharm (1985), Pogue (1970) Kiewiet and Szakaly (1996), Joulfaian and Marlow (1989) and Merrifield (1994). However, it is not clear which variables explain local governmentdebt.
A simple example illustrates the power of the Ricardian benchmark for debt management. Consider a government with an initial accumulated deficit and no future expenditures that must decide whether to finance the deficit by issuing short- or long-term bonds. If the government finances itself solely through the issuance of short-term debt, then the government will have to raise taxes if short-term interest rates rise. However, the rise in interest rates will leave a household that is lending short-term to the government with a bit more in its bank account. Since the government’s sources of funds (taxes and proceeds from issuing new debt) must equal its uses of funds (paying off maturing debt), the gain in the household’s bank accounts must precisely offset the increase in taxes. As a result, issuing more short-term governmentdebt increases the interest rate exposure of households’ future tax liabilities, but has a perfectly offsetting effect on the value of its portfolio of bond holdings. It follows that the government should be completely indifferent between issuing short- or long-term debt. This reflects the deeper point that, in a Ricardian world, government debts are not a form of “net wealth” for private actors; they simply reflect the present value of future tax liabilities.
Table 4 shows that the acceleration in GDP growth rate had a negative and significant impact on governmentdebt before 2006, a 1% point increase in GDP growth rate reduced budget deficit by almost 0.308 points relative to GDP in the high income countries in the region (oil exporting countries). The results also suggest that an increase in debt servicing cost by 1% point caused an increase in budget deficit by 0.343 points. Note that the variables measuring the cost of debt servicing, and the lagged deficit are the only highly significant factors explaining budget deficits after 2006 in these countries. Political stability also played a significant impact on reducing budget deficit for the whole period. All variables measuring food crisis have negative and insignificant impact on budget deficits, as most of these countries are net food importers and their food imports are covered by their oil exports, also most of these countries had applied food security programs as the Qatari program which was supposed to present formally its recommendations in 2012.
Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real YDOXH of governmentdebt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum). We describe some of WKH regulatory measures and policy actions that characterized the heyday of the financial repression era.