In January-September 2018, dynamics of federal budget revenues sped up. Based on the results of the past three quarters, their growth was equal to 2.4 p.p. of GDP (up to 18.9% of GDP). Administration of the budget as regards expenditures lags behind the rates of the previous year. Such trends permitted to facilitate a 3.5% of GDP surplus of the federal budget.
{"title":"Administration of the Federal Budget for Nine Months of 2018: Moderate Optimism","authors":"T. Tischenko","doi":"10.2139/ssrn.3296265","DOIUrl":"https://doi.org/10.2139/ssrn.3296265","url":null,"abstract":"In January-September 2018, dynamics of federal budget revenues sped up. Based on the results of the past three quarters, their growth was equal to 2.4 p.p. of GDP (up to 18.9% of GDP). Administration of the budget as regards expenditures lags behind the rates of the previous year. Such trends permitted to facilitate a 3.5% of GDP surplus of the federal budget.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-12-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127305014","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}
Pub Date : 2018-12-01DOI: 10.1108/JFEP-07-2019-0149
Corey Garriott, Sophie Lefebvre, G. Nolin, Francisco Rivadeneyra, Adrian Walton
Purpose This paper aims to present four blue-sky ideas for lowering the cost of the Government of Canada’s debt without increasing the debt’s risk profile. Design/methodology/approach The authors argue that each idea would improve the secondary-market liquidity of government debt, thereby increasing the demand for government bonds, and thus, lowering their cost at issuance. Findings The first two ideas would improve liquidity by enhancing the active management of the government’s debt through market operations used to support the liquidity of outstanding bonds. The second two ideas would simplify the set of securities issued by the government, concentrating issuance in a smaller set of bonds that would each be more highly traded. Originality/value The authors discuss the ideas and give an account of the political, legal and operational impediments.
{"title":"Alternative Futures for Government of Canada Debt Management","authors":"Corey Garriott, Sophie Lefebvre, G. Nolin, Francisco Rivadeneyra, Adrian Walton","doi":"10.1108/JFEP-07-2019-0149","DOIUrl":"https://doi.org/10.1108/JFEP-07-2019-0149","url":null,"abstract":"\u0000Purpose\u0000This paper aims to present four blue-sky ideas for lowering the cost of the Government of Canada’s debt without increasing the debt’s risk profile.\u0000\u0000\u0000Design/methodology/approach\u0000The authors argue that each idea would improve the secondary-market liquidity of government debt, thereby increasing the demand for government bonds, and thus, lowering their cost at issuance.\u0000\u0000\u0000Findings\u0000The first two ideas would improve liquidity by enhancing the active management of the government’s debt through market operations used to support the liquidity of outstanding bonds. The second two ideas would simplify the set of securities issued by the government, concentrating issuance in a smaller set of bonds that would each be more highly traded.\u0000\u0000\u0000Originality/value\u0000The authors discuss the ideas and give an account of the political, legal and operational impediments.\u0000","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121935909","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}
Pub Date : 2018-11-01DOI: 10.17573/CEPAR.2018.2.09
Dawid Sześciło, B. Wilk
The article addresses the participatory budgeting (PB), which is one of the most recognised governance innovations of recent decades. This global phenomenon represents in practice a shift towards participatory and collaborative management of public resources at the local level. The purpose of this article is to determine when top down approach to PB might be welcomed, taking into account the characteristics of PB schemes all around the world that they emerged as local initiatives, instigated either by civil society groups or local governments. The analysis is based on the description of the PB example as introduced via country-wide legislation, exhaustively regulating PB procedure. The article examines Polish experience in the field of functioning top down approach to PB. It demonstrates that top down PB can effectively work, if it is accompanied with significant incentives and grants, as well as the extensive autonomy and flexibility of local communities. Polish experience suggests that such an initiative might be relatively successful, yet there is a number of conditions that has to be met in order to ensure the dissemination of legislative model of participatory budgeting. The results have practical implications to central government institutions that consider introduction of some legislative framework for participatory budgeting at the local level. The originality of the research is in the analysis of one of successful stories of the PB introduced via country-wide legislation, and determining when this approach can work, also in other countries.
{"title":"Can Top Down Participatory Budgeting Work? The Case of Polish Community Fund","authors":"Dawid Sześciło, B. Wilk","doi":"10.17573/CEPAR.2018.2.09","DOIUrl":"https://doi.org/10.17573/CEPAR.2018.2.09","url":null,"abstract":"The article addresses the participatory budgeting (PB), which is one of the most recognised governance innovations of recent decades. This global phenomenon represents in practice a shift towards participatory and collaborative management of public resources at the local level. The purpose of this article is to determine when top down approach to PB might be welcomed, taking into account the characteristics of PB schemes all around the world that they emerged as local initiatives, instigated either by civil society groups or local governments. The analysis is based on the description of the PB example as introduced via country-wide legislation, exhaustively regulating PB procedure. The article examines Polish experience in the field of functioning top down approach to PB. It demonstrates that top down PB can effectively work, if it is accompanied with significant incentives and grants, as well as the extensive autonomy and flexibility of local communities. Polish experience suggests that such an initiative might be relatively successful, yet there is a number of conditions that has to be met in order to ensure the dissemination of legislative model of participatory budgeting. The results have practical implications to central government institutions that consider introduction of some legislative framework for participatory budgeting at the local level. The originality of the research is in the analysis of one of successful stories of the PB introduced via country-wide legislation, and determining when this approach can work, also in other countries.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117009118","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}
A debt management system is the backbone of any sovereign debt management office. A robust, well-functioning and user-friendly system allows governments to strengthen their debt management environment. This study aims to contribute to the literature on (i) the essential requirements of a debt management system, (ii) the selection criteria for software that fits the system modernization and integration needs of a debt management office, and (iii) how the solutions currently used by governments meet those requirements. It also contains the results of a survey that shows the current landscape of solutions used by a sample of debt management offices from 31 countries. The target audience is emerging and developing countries that seek to strengthen the information technology platform they use for debt management. The study concludes that it is fundamental for a debt management system to meet the debt management office's evolving needs, while at the same time differentiating among functions and coverage that are mandatory, relevant, and desirable. This differentiation provides a helpful guide for debt managers deciding between building a tailored debt management system from scratch or purchasing an off-the-shelf system. The survey results suggest that current systems can handle the critical functions and instruments of debt management offices. However, if the nature of respondents' debt portfolios evolves over time, system limitations may present challenges. One clear takeaway is that debt managers should consider the ability of their debt management system to interact with external (for example, financial management information system) information technology platforms as an essential characteristic of their information ecosystem.
{"title":"Study on Public Debt Management Systems and Results of a Survey on Solutions Used by Debt Management Offices","authors":"Cigdem Aslan, Artan Ajazaj, Shurufa Abdul Wahidh","doi":"10.1596/1813-9450-8544","DOIUrl":"https://doi.org/10.1596/1813-9450-8544","url":null,"abstract":"A debt management system is the backbone of any sovereign debt management office. A robust, well-functioning and user-friendly system allows governments to strengthen their debt management environment. This study aims to contribute to the literature on (i) the essential requirements of a debt management system, (ii) the selection criteria for software that fits the system modernization and integration needs of a debt management office, and (iii) how the solutions currently used by governments meet those requirements. It also contains the results of a survey that shows the current landscape of solutions used by a sample of debt management offices from 31 countries. The target audience is emerging and developing countries that seek to strengthen the information technology platform they use for debt management. The study concludes that it is fundamental for a debt management system to meet the debt management office's evolving needs, while at the same time differentiating among functions and coverage that are mandatory, relevant, and desirable. This differentiation provides a helpful guide for debt managers deciding between building a tailored debt management system from scratch or purchasing an off-the-shelf system. The survey results suggest that current systems can handle the critical functions and instruments of debt management offices. However, if the nature of respondents' debt portfolios evolves over time, system limitations may present challenges. One clear takeaway is that debt managers should consider the ability of their debt management system to interact with external (for example, financial management information system) information technology platforms as an essential characteristic of their information ecosystem.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129428008","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}
Pub Date : 2018-08-01DOI: 10.23895/kdijep.2018.40.3.91
K. Lee, Min-Kyung Hong
This paper aims to identify the most effective mode of development finance flows for the economic growth of middle-income developing and least developed countries, separately. It also attempts to confirm whether governance has any significant role in the causal relationship between development finance flows and economic growth. Policymakers in each developing country should select the most effective modality of development finance inflows among the different modalities (such as Official Development Assistance (ODA) grants, Official Development Assistance (ODA) loans, FDI, and international personal remittances) and expand it for their economic growth. Dynamic panel regression models were used on 48 least developed countries and 89 middle-income developing countries, respectively, during the Millennium Development Era: 2000-2015. The empirical analysis results show that ODA grants and remittances were most effective in promoting economic growth for least developed countries, while FDI was most effective for middle-income developing countries. These findings were not affected by the status of governance of the individual country.
{"title":"Relative Effectiveness of Various Development Finance Flows: A Comparative Study","authors":"K. Lee, Min-Kyung Hong","doi":"10.23895/kdijep.2018.40.3.91","DOIUrl":"https://doi.org/10.23895/kdijep.2018.40.3.91","url":null,"abstract":"This paper aims to identify the most effective mode of development finance flows for the economic growth of middle-income developing and least developed countries, separately. It also attempts to confirm whether governance has any significant role in the causal relationship between development finance flows and economic growth. Policymakers in each developing country should select the most effective modality of development finance inflows among the different modalities (such as Official Development Assistance (ODA) grants, Official Development Assistance (ODA) loans, FDI, and international personal remittances) and expand it for their economic growth. Dynamic panel regression models were used on 48 least developed countries and 89 middle-income developing countries, respectively, during the Millennium Development Era: 2000-2015. The empirical analysis results show that ODA grants and remittances were most effective in promoting economic growth for least developed countries, while FDI was most effective for middle-income developing countries. These findings were not affected by the status of governance of the individual country.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116124700","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}
Controlling government debt seems to be one of the top priorities for current Chinese leaders since debt expansion and accumulation has reached an alarming level in recent years. However, this paper shows that serious contradictions exist between policy statements and revealed preferences of policy makers. These are not only an indication on whether government debt can be successfully controlled, but also a reflection on more fundamental problems in China’s political-economic system. While economic restructuring calls for financial liberalization and allocative efficiency, political stabilization requires centralization and strengthening state capacity. The difficult challenges facing the Chinese leaders in the “New Era” has put the theory of “authoritarian resilience” to the real test.
{"title":"Who Hates Government Debt in China? Evidence from Revealed Preferences","authors":"Kang Chen","doi":"10.2139/ssrn.3220282","DOIUrl":"https://doi.org/10.2139/ssrn.3220282","url":null,"abstract":"Controlling government debt seems to be one of the top priorities for current Chinese leaders since debt expansion and accumulation has reached an alarming level in recent years. However, this paper shows that serious contradictions exist between policy statements and revealed preferences of policy makers. These are not only an indication on whether government debt can be successfully controlled, but also a reflection on more fundamental problems in China’s political-economic system. While economic restructuring calls for financial liberalization and allocative efficiency, political stabilization requires centralization and strengthening state capacity. The difficult challenges facing the Chinese leaders in the “New Era” has put the theory of “authoritarian resilience” to the real test.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-07-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121690492","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}
Remittances have grown tremendously in magnitude and economic importance in the past four decades, providing economies with additional disposable incomes and even serving as buffers against economic downturns. It is thus but fitting to ask how remittances have impacted on growth, particularly on manufacturing growth. This note presents a simple model linking remittances and manufacturing growth via a ‘Dutch Disease’ channel. Using Blundell and Bond's (1998) system general method of moments on a panel dataset of 56 developing economies from 1992 to 2016, we verify that remittances adversely affect manufacturing growth in economies that experience high real appreciation rates. This result is robust to alternate specifications, such as the inclusion of financial development indicators, the expansion of the sample to include high‐income economies, and the use of different sample periods.
{"title":"Remittances, Dutch Disease, and Manufacturing Growth in Developing Economies","authors":"S. L. Daway‐Ducanes","doi":"10.1111/sjpe.12185","DOIUrl":"https://doi.org/10.1111/sjpe.12185","url":null,"abstract":"Remittances have grown tremendously in magnitude and economic importance in the past four decades, providing economies with additional disposable incomes and even serving as buffers against economic downturns. It is thus but fitting to ask how remittances have impacted on growth, particularly on manufacturing growth. This note presents a simple model linking remittances and manufacturing growth via a ‘Dutch Disease’ channel. Using Blundell and Bond's (1998) system general method of moments on a panel dataset of 56 developing economies from 1992 to 2016, we verify that remittances adversely affect manufacturing growth in economies that experience high real appreciation rates. This result is robust to alternate specifications, such as the inclusion of financial development indicators, the expansion of the sample to include high‐income economies, and the use of different sample periods.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-07-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130784114","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 paper analyses the effect of formal and informal institutions on debt conditions for a sample of 37 countries over the period 2001-2012. The econometric methodology that we have used is panel data with fixed effects. The results show that greater legal enforcement, efficient institutions and greater trust tend to reduce the cost of debt and increase maturity. Moreover, this analysis has been carried out considering the degree of economic development and the joint effect of formal and informal institutions. Regarding with the degree of economic development, the results show that both formal and informal institutions has a greater influence in countries with a lower degree of economic development. As far as the joint effect of formal and informal institutions are concerned, our results support the view that formal and informal institutions act as substitutes in improving debt conditions.
{"title":"Influence of Formal and Informal Institutions On Debt Conditions","authors":"Celia Álvarez‐Botas, Víctor M. González","doi":"10.2139/ssrn.3210655","DOIUrl":"https://doi.org/10.2139/ssrn.3210655","url":null,"abstract":"This paper analyses the effect of formal and informal institutions on debt conditions for a sample of 37 countries over the period 2001-2012. The econometric methodology that we have used is panel data with fixed effects. The results show that greater legal enforcement, efficient institutions and greater trust tend to reduce the cost of debt and increase maturity. Moreover, this analysis has been carried out considering the degree of economic development and the joint effect of formal and informal institutions. Regarding with the degree of economic development, the results show that both formal and informal institutions has a greater influence in countries with a lower degree of economic development. As far as the joint effect of formal and informal institutions are concerned, our results support the view that formal and informal institutions act as substitutes in improving debt conditions.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130083760","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 2017, Canada’s senior governments spent some $782 billion on program expenditures and interest payments, amounting to 36 percent of gross domestic product. Control of public money is fundamental to democratic government, so it is natural to wonder how much of this activity – and the taxes, fees and borrowing that support it – reflects deliberate choices by voters and legislators. Formal accountability exists. Governments typically present budgets before or shortly after the start of the fiscal year, and budget votes are votes of confidence on which governments stand or fall. Legislatures and their committees play a key role in authorizing many specific expenditures. Governments table their public accounts, which present the audited results for actual revenues and expenses, after the end of the fiscal year. But comparing the expenses and revenues projected in the budgets of Canada’s federal, provincial and territorial governments at the beginning of the year with the results reported in their public accounts after the end of the year reveals that governments routinely miss their budget targets by economically meaningful amounts. More significant, they miss their targets in predictable ways: expenses and revenue typically come in above what the budgets promised. Over the past 15 years, senior governments’ cumulative spending overshoot adds up to $69 billion, with the Prairie Provinces and the Territories showing the biggest overruns. Even larger is the cumulative revenue overshoot: $104 billion. Governments in Canada are spending and taxing far more this year than they would have if they had delivered on their budget commitments. Comparing the annual patterns of overshoots and undershoots over time raises a further concern. Rather than overshoots of expenses coinciding with undershoots of revenue, or vice versa, as would happen if government finances were responding to economic cycles, overshoots on either side of the ledger tend to coincide – which suggests that governments are spending “windfalls” and/or managing the bottom line. Encouragingly, however, the tendency to overshoot and miss budget targets more generally, and the troubling annual patterns, seem to have become less pronounced over the past 15 years. Several steps, including estimates that are more timely and presented in the context of the government’s fiscal plan, a stronger role for legislative committees that authorize spending, and faster and more frequent publication of actual results, could further improve the record. Canada’s senior governments should improve the quality of their budget forecasts and their adherence to those forecasts, and legislators and voters should hold them accountable for doing so.
{"title":"Blown Budgets: Canada's Senior Governments Need Better Fiscal Controls","authors":"W. Robson, Farah Omran","doi":"10.2139/ssrn.3179857","DOIUrl":"https://doi.org/10.2139/ssrn.3179857","url":null,"abstract":"In 2017, Canada’s senior governments spent some $782 billion on program expenditures and interest payments, amounting to 36 percent of gross domestic product. Control of public money is fundamental to democratic government, so it is natural to wonder how much of this activity – and the taxes, fees and borrowing that support it – reflects deliberate choices by voters and legislators. Formal accountability exists. Governments typically present budgets before or shortly after the start of the fiscal year, and budget votes are votes of confidence on which governments stand or fall. Legislatures and their committees play a key role in authorizing many specific expenditures. Governments table their public accounts, which present the audited results for actual revenues and expenses, after the end of the fiscal year. But comparing the expenses and revenues projected in the budgets of Canada’s federal, provincial and territorial governments at the beginning of the year with the results reported in their public accounts after the end of the year reveals that governments routinely miss their budget targets by economically meaningful amounts. More significant, they miss their targets in predictable ways: expenses and revenue typically come in above what the budgets promised. Over the past 15 years, senior governments’ cumulative spending overshoot adds up to $69 billion, with the Prairie Provinces and the Territories showing the biggest overruns. Even larger is the cumulative revenue overshoot: $104 billion. Governments in Canada are spending and taxing far more this year than they would have if they had delivered on their budget commitments. Comparing the annual patterns of overshoots and undershoots over time raises a further concern. Rather than overshoots of expenses coinciding with undershoots of revenue, or vice versa, as would happen if government finances were responding to economic cycles, overshoots on either side of the ledger tend to coincide – which suggests that governments are spending “windfalls” and/or managing the bottom line. Encouragingly, however, the tendency to overshoot and miss budget targets more generally, and the troubling annual patterns, seem to have become less pronounced over the past 15 years. Several steps, including estimates that are more timely and presented in the context of the government’s fiscal plan, a stronger role for legislative committees that authorize spending, and faster and more frequent publication of actual results, could further improve the record. Canada’s senior governments should improve the quality of their budget forecasts and their adherence to those forecasts, and legislators and voters should hold them accountable for doing so.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-05-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133526878","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 paper documents that the increase in public debt can lead to higher dividend payout to shareholders, which suggests public debt can be a strong cash flow predictor which helps better predict future stock returns. Specifically, the higher public debt-to-GDP ratio can predict both higher dividend growth and higher stock returns, and the predicted changes are in the same magnitudes. The finding is consistent with Lettau and Ludvigson's (2005) argument that there exists a common component among stock returns and dividend growth. We argue that i) public debt can drive the co-movement among returns and dividend growth, and the existence of a common component can resolve the US asset pricing puzzle as emphasized by Cochrane (2007, 2011) that the dividend-price ratio can only predict discount rates but not cash flows; ii) the strong cash flow predictability of the public debt-to-GDP ratio can not be consumed by the popular consumption-to-wealth ratio (cay) and many other macroeconomic states variables; iii) future stocks returns can be better out-of-sample predicted after controlling for public debt. The empirical evidence documented in the US aggregate market can also be extended to the US cross-section and the international markets, especially for the advanced financial markets, which helps to explain the weak cash flow predictability recently documented by Rangvid et al. (2014) and Maio et al. (2015). To rationalize the finding, we propose a production-based asset pricing model incorporating cash-retention friction on the corporate sector. The model can produce testable predictions that the increase in public debt moves both dividend payment and the cost of capital in the same direction, resulting in the capture of the common component.
{"title":"Government Debt, Dividend Growth, and Stock Returns","authors":"Yulong Sun","doi":"10.2139/ssrn.3482543","DOIUrl":"https://doi.org/10.2139/ssrn.3482543","url":null,"abstract":"This paper documents that the increase in public debt can lead to higher dividend payout to shareholders, which suggests public debt can be a strong cash flow predictor which helps better predict future stock returns. Specifically, the higher public debt-to-GDP ratio can predict both higher dividend growth and higher stock returns, and the predicted changes are in the same magnitudes. The finding is consistent with Lettau and Ludvigson's (2005) argument that there exists a common component among stock returns and dividend growth. We argue that i) public debt can drive the co-movement among returns and dividend growth, and the existence of a common component can resolve the US asset pricing puzzle as emphasized by Cochrane (2007, 2011) that the dividend-price ratio can only predict discount rates but not cash flows; ii) the strong cash flow predictability of the public debt-to-GDP ratio can not be consumed by the popular consumption-to-wealth ratio (cay) and many other macroeconomic states variables; iii) future stocks returns can be better out-of-sample predicted after controlling for public debt. The empirical evidence documented in the US aggregate market can also be extended to the US cross-section and the international markets, especially for the advanced financial markets, which helps to explain the weak cash flow predictability recently documented by Rangvid et al. (2014) and Maio et al. (2015). To rationalize the finding, we propose a production-based asset pricing model incorporating cash-retention friction on the corporate sector. The model can produce testable predictions that the increase in public debt moves both dividend payment and the cost of capital in the same direction, resulting in the capture of the common component.","PeriodicalId":127865,"journal":{"name":"Political Economy: Budget","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-05-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127590783","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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