Public debt and inflation dynamics: Empirical evidence from Zimbabwe

The study seeks to empirically test the hypothesis that public debt has a significant influence on inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recent trends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflation related policy. These latest trends have started to ring alarming bells, which raises questions on the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in the country. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and an error correction mechanism (ECM), expanded by incorporating structural breaks, the study finds evidence in support of positive and significant impact of public debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on the findings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policy can be considered to be an important determinant of the effectiveness of monetary policy in Zimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.

Morale and Debt Dynamics

This paper shows that debt undermines relational incentives and harms worker morale. We build a dynamic model of a manager who uses limited financial resources to simultaneously repay a creditor and motivate a worker. If the manager can divert or misuse revenue, then debt makes the manager less willing to follow through on promised rewards, leading to low worker effort. In profit-maximizing equilibria, the firm prioritizes repaying its debts, leading to gradual increases in effort and wages. These dynamics can persist even after debts have been fully repaid. Consistent with this analysis, we document that a firm’s financial leverage is negatively related to measures of employee morale, wages, and productivity. This paper was accepted by Joshua Gans, business strategy.

Defence Spending and Sovereign Debt in Greece: A Long-Term Historical Perspective

The paper sets out to examine the military spending-public debt nexus in the case of Greece. Unlike previous studies that exclusively focus their analyses in the post-WWII period, the empirical investigation conducted herein covers almost the entire two hundred years of the modern Greek state. The estimations using an ARDL framework cover the period 1848–2018 as well as sub-periods therein. To the best of our knowledge, this is the first paper to approach this issue in the case of Greece with such a long-term perspective. In broad terms, the findings do not unearth a statistically traceable effect of defence expenditures on public debt accumulation. The results indicate that this was very much driven by debt dynamics and the need to draw funds to service existing loans. This finding is consistent across both the entire period under scrutiny here as well as the various sub-periods.

Public debt dynamics: the interaction with national income and fiscal policy

The 2008 financial crisis triggered the debt crisis in Europe. High debt-to-GDP ratios made it impossible for some countries to apply countercyclical policy in order to overcome the recession. As a result, highly indebted countries were forced to apply austerity measures to avoid sovereign default, which deepened even further the decline of their GDP. We examine the case of a highly indebted country, which is not cut off from the financial markets yet, using a bilinear difference equation system. We contemplate the dynamic equations of national income and sovereign debt together, as GDP fluctuations directly affect the debt evolution and we introduce the notion of the second relation, namely the deceleration of private investments due to sovereign debt. We build a new method for the implementation of fiscal policy, a feedback control of the economic system, and we stress its consequent policy implications. We contribute to the existing debt dynamics literature providing a new perspective for the interaction of public debt and GDP. The fiscal policy method we propose vanishes the dilemma between the front-loaded and back-loaded austerity, combines the fiscal recovery from a recession and the fiscal consolidation, as it immediately improves the debt-to-GDP ratio by increasing the national income and restraining the rise of public debt. Finally, we stress why the second relation is important for the implementation of fiscal policy, as its presence leads to a slower and more painful recovery.

Examination of Interest-Growth Differentials and the Risk of Sovereign Insolvency

The objective of this research was to demonstrate the (nonlinear) risks of sovereign insolvency and explore the applicability of stochastic modeling in public debt management, given a structural economic model of stochastic government debt dynamics. A stochastic optimal control model was developed to model public debt dynamics based on the debt accounting identity, where the interest-growth differential obeys a continuous random process. This stochasticity represents both the interest rate risk of public debt and the variability of the growth rate of the nominal Gross Domestic Product combined. The optimal fiscal policy was analyzed in terms of the model parameters. The model was simulated, and results were visualized. The insolvency risk was demonstrated by examining the variance of the optimal process. The model was amended with hidden credit risk premia and fiscal multipliers, which forces the debt dynamics to be nonlinear in the debt ratio. The results, on the other hand, confirm that the volatility of the interest-growth differential is crucial in terms of sovereign solvency and in addition, it demonstrates the large risks stemming from the multiplier effect, which underlines the need for prudent debt management and fiscal policy.

Policy asymmetries and fiscal sustainability: evidence from Nigeria

PurposeThis study examines and compares different specifications of the fiscal policy rule in the fiscal sustainability analysis of Nigeria.Design/methodology/approachThis is methodologically achieved by estimating the baseline constant-parameter and Markov regime switching fiscal models. The asymmetric autoregressive distributed lag fiscal model is also employed to substantiate the differential responses of fiscal authorities to public debt.FindingsThe baseline constant-parameter fiscal model provides mixed results of sustainable and unsustainable fiscal policy. The inconclusiveness is adduced to instability in primary fiscal balance–public debt dynamics. This makes it necessary to capture regime switches in the fiscal policy rule. The Markov switching estimations show a protracted fiscal unsustainable regime that is inconsistent with the intertemporal budget constraint (IBC). The no-Ponzi game and debt stabilizing results of the Markov switching fiscal model further revealed that the transversality and debt stability conditions were not satisfied. Additional findings from the asymmetric autoregressive model estimation show that fiscal consolidation responses vary with contraction and expansion in output and spending, coupled with downturns and upturns in public debt dynamics in both the long and short run. These findings thus confirm the presence of asymmetries in the fiscal policy authorities' reactions to public debt. Further, additional evidences show the violation of the IBC which is exacerbated by the deleterious effect of the pro-cyclical fiscal policy response in boom on the improvement of the primary fiscal balance.Originality/valueThis study deviates from the extant literature by accommodating time variation, periodic switches and fiscal policy asymmetries in the fiscal sustainability analysis of Nigeria.

Placing Contemporary Sovereign Debt

Since 2003, the battle between holdout creditors and the Argentine government in US courts has inspired a number of judicious studies on its legal underpinnings and repercussions. It has also prompted so-called ‘anti-vulture funds’ laws in countries like the UK, Belgium, and France. Despite these developments, the role of place in debt restructurings has remained relatively neglected. The paper analyses domestic laws protecting foreign debtors from minority holdout litigation and injunctive orders in federal courts that incite contractual changes as part of a fragmented landscape of local, and at times overlapping, spheres of sovereign debt governance, paradoxically embedded in a deeply integrated global financial system. A key finding of this analysis is that while contracts ground debt dynamics in specific jurisdictions (financial centres), they do not reduce uncertainty in the outcomes of sovereign debt restructurings. Moreover, financial centres have functioned not only as sites for private market-making, but also for public experimentation in international debt processes.

Sovereign Debt Restructuring: A Modest Proposal

Many sovereigns, including weaker credits, have taken on substantial debt during the COVID-19 pandemic. This raises the prospect of future defaults and sovereign restructurings, which will be informed by debt-sustainability analysis. But when analyzing notable recent sovereign defaults, we find a pattern of serially correlated errors: the analysis at the time of the restructuring is too optimistic about future sovereign debt dynamics. In light of this, I propose that future sustainability analysis should be based on more pessimistic expectations. In turn, this implies that sovereign creditors should face larger losses in future restructurings.