We study how shifting global macroeconomic conditions affect sovereign bond prices. Bondholders earn premia for two sources of systematic risk: exposure to low-frequency changes in the state of the economy, as captured by expected macroeconomic growth and volatility, and exposure to higher-frequency macroeconomic shocks. Our model predicts that the first source, labeled “long-run macro risk”, is the primary driver of the level and the cross-sectional variation in sovereign bond premia. We find support for this prediction using sovereign bond return data for 43 countries. A long-short portfolio based on long-run macro risk earns 8.11% per year in our sample.
{"title":"Sovereign Risk Premia and Global Macroeconomic Conditions","authors":"Sandro C. Andrade, Adelphe Ekponon, A. Jeanneret","doi":"10.2139/ssrn.3162853","DOIUrl":"https://doi.org/10.2139/ssrn.3162853","url":null,"abstract":"We study how shifting global macroeconomic conditions affect sovereign bond prices. Bondholders earn premia for two sources of systematic risk: exposure to low-frequency changes in the state of the economy, as captured by expected macroeconomic growth and volatility, and exposure to higher-frequency macroeconomic shocks. Our model predicts that the first source, labeled “long-run macro risk”, is the primary driver of the level and the cross-sectional variation in sovereign bond premia. We find support for this prediction using sovereign bond return data for 43 countries. A long-short portfolio based on long-run macro risk earns 8.11% per year in our sample.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122739061","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The U.S. federal government's deficit is expected to grow to over one trillion dollars in fiscal year (FY) 2020, and the national debt held by the public will likely grow to over $16.7 trillion. Budgeting scholars in the field of public administration have expressed concern over the increasing debt levels. The field of public administration, however, is largely unaware of Modern Money Theory (MMT) and the mechanics of money, which is its focus. MMT argues that understanding the mechanics of money in the U.S. financial system should lead scholars to different conclusions regarding the debt and deficit. This article presents the core arguments of the MMT perspective in this regard, with the goal to trigger further debates about debt and deficit among the community of budgeting scholars.
{"title":"Who is Afraid of the Big Bad Debt? A Modern Money Theory Perspective on Federal Deficits and Debt","authors":"J. Douglas, Ringa Raudla","doi":"10.1111/pbaf.12247","DOIUrl":"https://doi.org/10.1111/pbaf.12247","url":null,"abstract":"The U.S. federal government's deficit is expected to grow to over one trillion dollars in fiscal year (FY) 2020, and the national debt held by the public will likely grow to over $16.7 trillion. Budgeting scholars in the field of public administration have expressed concern over the increasing debt levels. The field of public administration, however, is largely unaware of Modern Money Theory (MMT) and the mechanics of money, which is its focus. MMT argues that understanding the mechanics of money in the U.S. financial system should lead scholars to different conclusions regarding the debt and deficit. This article presents the core arguments of the MMT perspective in this regard, with the goal to trigger further debates about debt and deficit among the community of budgeting scholars.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115047727","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
While Modern Monetary Theory (MMT) offers contributions that are worthy of serious consideration, some additional theory‐building and synthesis with existing theory may be in order to tie MMT into the established budgeting literature. MMT focuses primarily on monetarily sovereign governments. These are governments that face extremely “soft” budget constraints insofar as they: issue and regulate the value of their own currencies, possess central banks that function as the fiscal agents of their government treasuries, are able to issue sovereign debt denominated in their domestic currency, and operate in a system of freely‐floating currency exchange rates, with a minimum of currency and capital controls. National governments that are sovereign according to these criteria are able to make all debt service payments as they come due, virtually without regard to their level of outstanding debt; they cannot be forced to default against their will. They are also macroeconomically‐autonomous. It is the collective position of the symposium papers that these conditions describe, in precise terms, the fiscal position of the U.S. federal government. As such, the existence of an ultra‐soft U.S. government budget constraint is grounded in the extremely favorable conditions of money and credit that the federal government is subject to, and which in fact it has created and nurtured for itself since the Second World War. An important implication is that the federal level budgeting literature cannot ignore the macroeconomics and the administration of a sovereign currency regime, nor the monetary economics that ungirds it, without sustaining charges of unrealism.
{"title":"Post‐Keynesian Public Budgeting & Finance: Assessing Contributions from Modern Monetary Theory","authors":"R. Kravchuk","doi":"10.1111/pbaf.12268","DOIUrl":"https://doi.org/10.1111/pbaf.12268","url":null,"abstract":"While Modern Monetary Theory (MMT) offers contributions that are worthy of serious consideration, some additional theory‐building and synthesis with existing theory may be in order to tie MMT into the established budgeting literature. MMT focuses primarily on monetarily sovereign governments. These are governments that face extremely “soft” budget constraints insofar as they: issue and regulate the value of their own currencies, possess central banks that function as the fiscal agents of their government treasuries, are able to issue sovereign debt denominated in their domestic currency, and operate in a system of freely‐floating currency exchange rates, with a minimum of currency and capital controls. National governments that are sovereign according to these criteria are able to make all debt service payments as they come due, virtually without regard to their level of outstanding debt; they cannot be forced to default against their will. They are also macroeconomically‐autonomous. It is the collective position of the symposium papers that these conditions describe, in precise terms, the fiscal position of the U.S. federal government. As such, the existence of an ultra‐soft U.S. government budget constraint is grounded in the extremely favorable conditions of money and credit that the federal government is subject to, and which in fact it has created and nurtured for itself since the Second World War. An important implication is that the federal level budgeting literature cannot ignore the macroeconomics and the administration of a sovereign currency regime, nor the monetary economics that ungirds it, without sustaining charges of unrealism.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128602613","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
One of the key institutional elements for reducing inequality is the tax and transfer system. However, economists and policymakers usually view high taxes as detrimental to economic growth. We isolate one important mechanism by which higher taxes reduce inequality and raise per capita gross domestic product (GDP) at the same time. This mechanism operates in the presence of unproductive lobbying. Higher taxes induce a reallocation from lobbying toward production. This raises overall output and reduces the consumption gap between those who benefit from lobbying and those who bear its negative effects.
{"title":"Can Taxes Raise Output and Reduce Inequality? The Case of Lobbying","authors":"K. Prettner, Davud Rostam‐Afschar","doi":"10.1111/sjpe.12248","DOIUrl":"https://doi.org/10.1111/sjpe.12248","url":null,"abstract":"One of the key institutional elements for reducing inequality is the tax and transfer system. However, economists and policymakers usually view high taxes as detrimental to economic growth. We isolate one important mechanism by which higher taxes reduce inequality and raise per capita gross domestic product (GDP) at the same time. This mechanism operates in the presence of unproductive lobbying. Higher taxes induce a reallocation from lobbying toward production. This raises overall output and reduces the consumption gap between those who benefit from lobbying and those who bear its negative effects.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115372125","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the past decade, the proliferation of online marketplace lending has been disrupting the consumer credit market, especially for personal loans for debt consolidation. These lenders, for example, Lending Club, transcend the geographic boundaries within which local banks operate and offer homogeneous access and terms to borrowers. However, the ultimate benefits borrowers derive from marketplace lending can differ significantly because local alternatives may replace marketplace loans when available and favorable. Correspondingly, if local bank competition drives the substitution of an existing marketplace loan with a traditional bank loan, the promise of equal benefits to all borrowers from marketplace lending is unlikely to fully materialize. This competitive dynamic has implications for policy making, particularly in judging the ramifications of bank mergers and acquisitions (M&As). Our results indicate that a borrower who resides in a more competitive market is more likely to pay off a P2P loan early by making a large, one-time payment compared with a borrower from a less competitive market, indicating a substitution with a local bank loan. Thus, borrowers from different markets do not benefit equally from online marketplace lending, disrupting the consumer credit market. In particular, consumers in smaller markets continue to be disadvantaged because of the absence of competitive intensity. This is a consequence of traditional banks competing within their local markets and incentivized to attract marketplace borrowers to traditional loans primarily by their local market conditions. Therefore, unless geographic frictions in traditional lending markets are removed, digital disruptions cannot equalize the benefits to consumers.
{"title":"Where You Live Matters: Local Bank Competition, Online Marketplace Lending, and Disparity in Borrower Benefits","authors":"Mohammed Alyakoob, M. Rahman, Zaiyan Wei","doi":"10.2139/ssrn.2985099","DOIUrl":"https://doi.org/10.2139/ssrn.2985099","url":null,"abstract":"In the past decade, the proliferation of online marketplace lending has been disrupting the consumer credit market, especially for personal loans for debt consolidation. These lenders, for example, Lending Club, transcend the geographic boundaries within which local banks operate and offer homogeneous access and terms to borrowers. However, the ultimate benefits borrowers derive from marketplace lending can differ significantly because local alternatives may replace marketplace loans when available and favorable. Correspondingly, if local bank competition drives the substitution of an existing marketplace loan with a traditional bank loan, the promise of equal benefits to all borrowers from marketplace lending is unlikely to fully materialize. This competitive dynamic has implications for policy making, particularly in judging the ramifications of bank mergers and acquisitions (M&As). Our results indicate that a borrower who resides in a more competitive market is more likely to pay off a P2P loan early by making a large, one-time payment compared with a borrower from a less competitive market, indicating a substitution with a local bank loan. Thus, borrowers from different markets do not benefit equally from online marketplace lending, disrupting the consumer credit market. In particular, consumers in smaller markets continue to be disadvantaged because of the absence of competitive intensity. This is a consequence of traditional banks competing within their local markets and incentivized to attract marketplace borrowers to traditional loans primarily by their local market conditions. Therefore, unless geographic frictions in traditional lending markets are removed, digital disruptions cannot equalize the benefits to consumers.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116524388","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use close elections in parliamentary democracies as natural experiments to estimate public debt levels’ effects on real interest rates. We first estimate that an election in which no party achieves a parliamentary majority causes the debt-to-GDP ratio to increase by 21 percentage points over the following five years relative to an election in which one party barely secures a majority. We next estimate that real interest rates rise by a relative 119 basis points following such an election, implying that a one percentage point increase in the debt-to-GDP ratio causes a 5.6 basis point increase in real rates. That effect is larger than most previous estimates in the literature, suggesting the potential importance of simultaneity in the determination of real rates and government debt levels.
{"title":"Public Debt Levels and Real Interest Rates: Causal Evidence from Parliamentary Elections","authors":"Gabriel Ehrlich, Aditi Thapar","doi":"10.2139/ssrn.3603563","DOIUrl":"https://doi.org/10.2139/ssrn.3603563","url":null,"abstract":"We use close elections in parliamentary democracies as natural experiments to estimate public debt levels’ effects on real interest rates. We first estimate that an election in which no party achieves a parliamentary majority causes the debt-to-GDP ratio to increase by 21 percentage points over the following five years relative to an election in which one party barely secures a majority. We next estimate that real interest rates rise by a relative 119 basis points following such an election, implying that a one percentage point increase in the debt-to-GDP ratio causes a 5.6 basis point increase in real rates. That effect is larger than most previous estimates in the literature, suggesting the potential importance of simultaneity in the determination of real rates and government debt levels.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-05-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115332792","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This internet appendix complements the paper “Trading Credit (Subsidies) for Votes: The Effect of Local Politics on Small Business Lending” and is organized as follows: Appendix A provides the main results of the paper under alternative regression discontinuity specifications, Appendix B provides additional results on the performance of SBA loans, Appendix C provides the benchmark results of the paper separately for the 504 and 7(a) loan programs, Appendix D provides analysis of alternative channels of government influence on the local economy, and Appendix E provides the regression discontinuity plots not presented in the main paper.
{"title":"Internet Appendix for 'Trading Credit (Subsidies) for Votes: The Effect of Local Politics on Small Business Lending'","authors":"Sahil Raina, Sheng-Jun Xu","doi":"10.2139/ssrn.3599539","DOIUrl":"https://doi.org/10.2139/ssrn.3599539","url":null,"abstract":"This internet appendix complements the paper “Trading Credit (Subsidies) for Votes: The Effect of Local Politics on Small Business Lending” and is organized as follows: Appendix A provides the main results of the paper under alternative regression discontinuity specifications, Appendix B provides additional results on the performance of SBA loans, Appendix C provides the benchmark results of the paper separately for the 504 and 7(a) loan programs, Appendix D provides analysis of alternative channels of government influence on the local economy, and Appendix E provides the regression discontinuity plots not presented in the main paper.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-05-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115765328","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract We extend and refine Aguiar and Amador (2019) 's contraction approach to Eaton and Gersovitz (1981) 's sovereign debt model. In particular, we encompass time-varying interest rates and growth. We show that, when long-term interest rates exceed growth, equilibrium is unique and can be computed via contraction mapping. The method unifies separate branches of literature, showing that the contraction property is the reflection of previous arbitrage arguments based on replication, inspired by Bulow and Rogoff (1989) .
{"title":"On Sovereign Default With Time-Varying Interest Rates","authors":"G. Bloise, Yiannis Vailakis","doi":"10.2139/ssrn.3585667","DOIUrl":"https://doi.org/10.2139/ssrn.3585667","url":null,"abstract":"Abstract We extend and refine Aguiar and Amador (2019) 's contraction approach to Eaton and Gersovitz (1981) 's sovereign debt model. In particular, we encompass time-varying interest rates and growth. We show that, when long-term interest rates exceed growth, equilibrium is unique and can be computed via contraction mapping. The method unifies separate branches of literature, showing that the contraction property is the reflection of previous arbitrage arguments based on replication, inspired by Bulow and Rogoff (1989) .","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-04-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120998299","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use hand-collected data to investigate the COVID-19 bailouts for all publicly listed US firms. The median tax rate is 4% for bailout firms and 16% for no-bailout firms. The bailouts are expensive when compared to past corporate income tax payments of the bailout firms. We compute the number of years a bailout recipient has to pay corporate income tax to generate as much tax revenue as it received in bailouts: 135.0 years for the Paycheck Protection Program and 267.9 years for the airline bailouts. We also document a dark side of the bailouts. For many firms, the bailouts appear to be a windfall. Numerous bailout recipients made risky financial decisions, so bailing them out might induce moral hazard. Moreover, lobbying expenditures positively predict the bailout likelihood and amount.
{"title":"The COVID-19 Bailouts","authors":"J. Meier, Jake Smith","doi":"10.2139/ssrn.3585515","DOIUrl":"https://doi.org/10.2139/ssrn.3585515","url":null,"abstract":"We use hand-collected data to investigate the COVID-19 bailouts for all publicly listed US firms. The median tax rate is 4% for bailout firms and 16% for no-bailout firms. The bailouts are expensive when compared to past corporate income tax payments of the bailout firms. We compute the number of years a bailout recipient has to pay corporate income tax to generate as much tax revenue as it received in bailouts: 135.0 years for the Paycheck Protection Program and 267.9 years for the airline bailouts. We also document a dark side of the bailouts. For many firms, the bailouts appear to be a windfall. Numerous bailout recipients made risky financial decisions, so bailing them out might induce moral hazard. Moreover, lobbying expenditures positively predict the bailout likelihood and amount.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-04-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133132555","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
S. Belev, Konstantin Vekerle, E. Matveev, E. Leonov, I. Sokolov, Olga Suchkova
The paper provides an overview of theoretical and empirical studies of the various effects of labor taxation, as well as a review of international social security contribution practices. Three main effects of labor taxation change were identified: intensive margin (the change in working time), extensive margin (whether to participate in job market or not) and the effect of tax evasion. The paper also presents econometric estimation of budget effects. In the presence of high sensitivity to social security premium rates change it is advisable to reduce social security premium rates for low income groups.
{"title":"Исследование бюджетных эффектов от изменения ставок страховых взносов (Research on Budgetary Effects of Changes in Insurance Premium Rates)","authors":"S. Belev, Konstantin Vekerle, E. Matveev, E. Leonov, I. Sokolov, Olga Suchkova","doi":"10.2139/ssrn.3677856","DOIUrl":"https://doi.org/10.2139/ssrn.3677856","url":null,"abstract":"The paper provides an overview of theoretical and empirical studies of the various effects of labor taxation, as well as a review of international social security contribution practices. Three main effects of labor taxation change were identified: intensive margin (the change in working time), extensive margin (whether to participate in job market or not) and the effect of tax evasion. The paper also presents econometric estimation of budget effects. In the presence of high sensitivity to social security premium rates change it is advisable to reduce social security premium rates for low income groups.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129658571","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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