General Government Debt
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Economic Quarterly
Forecasting the Effects of Reduced Defense Spending Peter Irel’and and Chtitopher Omk ’ I. INTRODUCTION $1 cut in defense spending acts to decrease the total demand for goods and services in each period by $1. The end of the Cold War provides the United Of course, so long as the government has access to States with an opportunity to cut its defense the same production technologies that are available spending significantly. Indeed, the Bush Administra- to the private sector, this prediction of the tion’s 1992-1997 Future Years Defense Program neoclassical model does not change if instead the (presented in 1991 and therefore referred to as the government produces the defense services itself.’ “1991 plan”) calls for a 20 percent reduction in real defense spending by 1997. Although expenditures A permanent $1 cut in defense spending also related to Operation Desert Storm have delayed the reduces the government’s need for tax revenue; it implementation of the 199 1 plan, policymakers con- implies that taxes can be cut by $1 in each period. tinue to call for defense cutbacks. In fact, since Bush’s Households, therefore, are wealthier following the plan was drafted prior to the collapse of the Soviet cut in defense spending; their permanent income in- Union, it seems likely that the Clinton Administra- creases by $b1. According to the permanent income tion will propose cuts in defense spending that are hypothesis, this $1 increase in permanent income even deeper than those specified by the 1991 plan. induces households to increase their consumption by This paper draws on both theoretical and empirical $1 in every period, provided that their labor supply economic models to forecast the effects that these does not change. -
Internal Debt and Multinational Profit Shifting: Empirical Evidence from Firm-Level Panel Data
National Tax Journal, March 2013, 66 (1), 63–96 INTERNAL DEBT AND MULTINATIONAL PROFIT SHIFTING: EMPIRICAL EVIDENCE FROM FIRM-LEVEL PANEL DATA Thiess Buettner and Georg Wamser This paper explores the role of internal debt as a vehicle for shifting profi ts to low- tax countries. Using data on German multinationals, it exploits differences in taxes in more than 100 countries over 10 years. The results confi rm that internal debt is used more by multinationals with affi liates in low-tax countries and increases with the spread between the host-country tax rate and the lowest tax rate among all affi liates. However, tax effects are small, suggesting that profi t shifting by means of internal debt is rather unimportant for German fi rms. Further testing indicates that this is partly due to the German controlled foreign corporation (CFC) rule. Keywords: capital structure, multinational corporations, internal debt, corporate taxation, tax planning, profi t shifting, income shifting JEL Codes: H25, G32, F23 I. INTRODUCTION ue to the rising importance of foreign direct investment (FDI) and multinational Dfi rms, international tax issues are of increasing importance for tax policy. As noted in the literature (Gresik, 2001), a multinational corporation has several ways to structure its activities in order to minimize the burden of taxation. This tax planning partly involves conventional decisions to set up fi rms in a tax-effi cient way, for example by using debt rather than equity fi nance. Yet multinational tax planning also involves less conventional practices that exploit the specifi c characteristics of multinationals. In particular, tax planning employs profi t-shifting techniques that only require the adjustment of the internal structure of the multinational fi rm. -
Interest-Rate-Growth Differentials and Government Debt Dynamics
From: OECD Journal: Economic Studies Access the journal at: http://dx.doi.org/10.1787/19952856 Interest-rate-growth differentials and government debt dynamics David Turner, Francesca Spinelli Please cite this article as: Turner, David and Francesca Spinelli (2012), “Interest-rate-growth differentials and government debt dynamics”, OECD Journal: Economic Studies, Vol. 2012/1. http://dx.doi.org/10.1787/eco_studies-2012-5k912k0zkhf8 This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. OECD Journal: Economic Studies Volume 2012 © OECD 2013 Interest-rate-growth differentials and government debt dynamics by David Turner and Francesca Spinelli* The differential between the interest rate paid to service government debt and the growth rate of the economy is a key concept in assessing fiscal sustainability. Among OECD economies, this differential was unusually low for much of the last decade compared with the 1980s and the first half of the 1990s. This article investigates the reasons behind this profile using panel estimation on selected OECD economies as means of providing some guidance as to its future development. The results suggest that the fall is partly explained by lower inflation volatility associated with the adoption of monetary policy regimes credibly targeting low inflation, which might be expected to continue. However, the low differential is also partly explained by factors which are likely to be reversed in the future, including very low policy rates, the “global savings glut” and the effect which the European Monetary Union had in reducing long-term interest differentials in the pre-crisis period. -
Equivalence in the Internal and External Public Debt Burden Philippe Darreau, François Pigalle
Equivalence in the internal and external public debt burden Philippe Darreau, François Pigalle To cite this version: Philippe Darreau, François Pigalle. Equivalence in the internal and external public debt burden. Economics Bulletin, Economics Bulletin, 2013, 33, pp.2475 - 2482. hal-01076343 HAL Id: hal-01076343 https://hal.archives-ouvertes.fr/hal-01076343 Submitted on 21 Oct 2014 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. Economics Bulletin, 2013, Vol. 33 No. 4 pp. 2475-2482 1. Introduction According to Modigliani (1961), the debt burden is a reduction in the aggregate stock of private capital, which will lead to a reduction in the flow of goods and services for future generations. Debt is a burden, because it crowds out capital. But does this burden differ, depending on whether the debt is "internal" (held by domestic agents) or "external" (held by foreign agents)? Conflicting arguments persist in relation to the burden of debt, according to whether it is internal or external. Lerner (1948) argues that external public debt is a burden, whereas internal public debt is not. The sale of bonds abroad generates a charge for the nation, whose servicing represents a perpetual trade surplus that future generations must bear. -
Corporate Bond Markets: A
Staff Working Paper: [SWP4/2014] Corporate Bond Markets: A Global Perspective Volume 1 April 2014 Staff Working Paper of the IOSCO Research Department Authors: Rohini Tendulkar and Gigi Hancock1 This Staff Working Paper should not be reported as representing the views of IOSCO. The views and opinions expressed in this Staff Working Paper are those of the authors only and do not necessarily reflect the views of the International Organization of Securities Commissions or its members. For further information please contact: [email protected] 1 Rohini Tendulkar is an Economist and Gigi Hancock is an Intern in IOSCO’s Research Department. They would like to thank Werner Bijkerk, Shane Worner and Luca Giordano for their assistance. 1 About this Document The IOSCO Research Department produces research and analysis on a range of securities markets issues, risks and developments. To support these efforts, the IOSCO Research Department undertakes a number of annual information mining exercises including extensive market intelligence in financial centers; risk roundtables with prominent members of industry and regulators; data gathering and analysis; the construction of quantitative risk indicators; a survey on emerging risks to regulators, academics and market participants; and review of the current literature on risks by experts. Developments in corporate bond markets have been flagged a number of times during these exercises. In particular, the lack of data on secondary market trading and, in general, issues in emerging market corporate bond markets, have been highlighted as an obstacle in understanding how securities markets are functioning and growing world-wide. Furthermore, the IOSCO Board has recognized, through establishment of a long-term finance project, the important contribution IOSCO and its members can and do make in ensuring capital markets play a leading role in supporting long term investment in both growth and emerging and developed economies. -
Economic Chapters of the 85Th Annual Report, June 2015
85th Annual Report 1 April 2014–31 March 2015 Basel, 28 June 2015 This publication is available on the BIS website (www.bis.org/publ/arpdf/ar2015e.htm). Also published in French, German, Italian and Spanish. © Bank for International Settlements 2015. All rights reserved. Limited extracts may be reproduced or translated provided the source is stated. ISSN 1021-2477 (print) ISSN 1682-7708 (online) ISBN 978-92-9197-064-3 (print) ISBN 978-92-9197-066-7 (online) Contents Letter of transmittal ..................................................... 1 Overview of the economic chapters .................................. 3 I. Is the unthinkable becoming routine? ............................. 7 The global economy: where it is and where it may be going ...................... 9 Looking back: recent evolution ............................................ 9 Looking ahead: risks and tensions .......................................... 10 The deeper causes ............................................................ 13 Ideas and perspectives . 13 Excess financial elasticity .................................................. 15 Why are interest rates so low? ............................................. 17 Policy implications ............................................................ 18 Adjusting frameworks ..................................................... 18 What to do now? ........................................................ 21 Conclusion . 22 II. Global financial markets remain dependent on central banks 25 Further monetary accommodation but diverging -
National Debt in a Neoclassical Growth Model
NATIONAL DEBT IN A NEOCLASSICAL GROWTH MODEL By PETER A. DIAMOND* This paper contains a model designed to serve two purposes, to examine long-run competitive equilibrium in a growth model and then to explore the effects on this equilibrium of government debt. Samuel- son [8] has examined the determination of interest rates in a single- commodity world without durable goods. In such an economy, interest rates are determined by consumption loans between individuals of different ages. By introducing production employing a durable capital good into this model, one can examine the case where individuals pro- vide for their retirement years by lending to entrepreneurs. After de- scribing alternative long-run equilibria available to a centrally planned economy, the competitive solution is described. In this economy, which has an infinitely long life, it is seen that, despite the absence of all the usual sources of inefficiency, the competitive solution can be inefficient. Modigliani [4] has explored the effects of the existence of govern- ment debt in an aggregate growth model. By introducing a government which issues debt and levies taxes to finance interest payments into the model described in the first part, it is possible to re-examine his conclusions in a model where consumption decisions are made indi- vidually, where taxes to finance the debt are included in the analysis, and where the changes in output arising from changes in the capital stock are explicitly acknowledged. It is seen that in the "normal" case external debt reduces the utility of an individual living in long-run equilibrium. Surprisingly, internal debt is seen to cause an even larger decline in this utility level. -
Government Debt
Government Debt Douglas W. Elmendorf Federal Reserve Board N. Gregory Mankiw Harvard University and NBER January 1998 This paper was prepared for the Handbook of Macroeconomics. We are grateful to Michael Dotsey, Richard Johnson, David Wilcox, and Michael Woodford for helpful comments. The views expressed in this paper are our own and not necessarily those of any institution with which we are affiliated. Abstract This paper surveys the literature on the macroeconomic effects of government debt. It begins by discussing the data on debt and deficits, including the historical time series, measurement issues, and projections of future fiscal policy. The paper then presents the conventional theory of government debt, which emphasizes aggregate demand in the short run and crowding out in the long run. It next examines the theoretical and empirical debate over the theory of debt neutrality called Ricardian equivalence. Finally, the paper considers the various normative perspectives about how the government should use its ability to borrow. JEL Nos. E6, H6 Introduction An important economic issue facing policymakers during the last two decades of the twentieth century has been the effects of government debt. The reason is a simple one: The debt of the U.S. federal government rose from 26 percent of GDP in 1980 to 50 percent of GDP in 1997. Many European countries exhibited a similar pattern during this period. In the past, such large increases in government debt occurred only during wars or depressions. Recently, however, policymakers have had no ready excuse. This episode raises a classic question: How does government debt affect the economy? That is the question that we take up in this paper. -
February 9, 2020 Falling Real Interest Rates, Rising Debt: a Free Lunch?
February 9, 2020 Falling Real Interest Rates, Rising Debt: A Free Lunch? By Kenneth Rogoff, Harvard University1 1 An earlier version of this paper was presented at the American Economic Association January 3 2020 meeting in San Diego in a session entitled “The United States Economy: Growth, Stagnation or New Financial Crisis?” chaired by Dominick Salvatore. The author is grateful to Molly and Dominic Ferrante Fund at Harvard University for research support. 1 With real interest rates hovering near multi-decade lows, and even below today’s slow growth rates, has higher government debt become a proverbial free lunch in many advanced countries?2 It is certainly true that low borrowing rates help justify greater government spending on high social return investment and education projects, and should make governments more relaxed about countercyclical fiscal policy, the “free lunch” perspective is an illusion that ignores most governments’ massive off-balance-sheet obligations, as well the possibility that borrowing rates could rise in a future economic crisis, even if they fell in the last one. As Lawrence Kotlikoff (2019) has long emphasized (see also Auerbach, Gokhale and Kotlikoff, 1992) 3 standard measures of government in debt have in some sense become an accounting fiction in the modern post World War II welfare state. Every advanced economy government today spends more on publicly provided old age support and pensions alone than on interest payment, and would still be doing so even if real interest rates on government debt were two percent higher. And that does not take account of other social insurance programs, most notably old-age medical care. -
Introduction Section 4000.1
Introduction Section 4000.1 This section contains product profiles of finan- Each product profile contains a general cial instruments that examiners may encounter description of the product, its basic character- during the course of their review of capital- istics and features, a depiction of the market- markets and trading activities. Knowledge of place, market transparency, and the product’s specific financial instruments is essential for uses. The profiles also discuss pricing conven- examiners’ successful review of these activities. tions, hedging issues, risks, accounting, risk- These product profiles are intended as a general based capital treatments, and legal limitations. reference for examiners; they are not intended to Finally, each profile contains references for be independently comprehensive but are struc- more information. tured to give a basic overview of the instruments. Trading and Capital-Markets Activities Manual February 1998 Page 1 Federal Funds Section 4005.1 GENERAL DESCRIPTION commonly used to transfer funds between depository institutions: Federal funds (fed funds) are reserves held in a bank’s Federal Reserve Bank account. If a bank • The selling institution authorizes its district holds more fed funds than is required to cover Federal Reserve Bank to debit its reserve its Regulation D reserve requirement, those account and credit the reserve account of the excess reserves may be lent to another financial buying institution. Fedwire, the Federal institution with an account at a Federal Reserve Reserve’s electronic funds and securities trans- Bank. To the borrowing institution, these funds fer network, is used to complete the transfer are fed funds purchased. To the lending institu- with immediate settlement. -
Daily Comment
Daily Comment By Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA Looking for something to read? See our Reading List; these books, separated by category, are ones we find interesting and insightful. We will be adding to the list over time. [Posted: April 21, 2020—9:30 AM EDT] Global equity markets are lower this morning. The EuroStoxx 50 is down 2.5% from its last close. In Asia, the MSCI Asia Apex 50 closed down 1.8% from the prior close. Chinese markets were lower, with the Shanghai Composite down 0.9% and the Shenzhen Composite down 0.8%. U.S. equity index futures are signaling a lower open. With 54 companies having reported, the S&P 500 Q1 earnings stand at $32.90, lower than the $35.51 forecast for the quarter. The forecast reflects a 10.0% decrease from Q1 2019 earnings. Thus far this quarter, 70.4% of the companies have reported earnings above forecast, while 29.6% have reported earnings below forecast. Happy Tuesday! Or if not “happy,” at least things are “interesting.” U.S. oil prices yesterday not only went negative, but deeply negative. As always, we discuss the coronavirus crisis and its latest implications below, along with reports of a new government in Israel and indications that North Korean leader Kim Jong Un may be dying. COVID-19: Official data show confirmed cases have risen to 2,495,994 worldwide, with 171,652 deaths and 658,802 recoveries. In the United States, confirmed cases rose to 787,960, with 42,364 deaths and 73,527 recoveries. -
Financial Accounts of the United States
RFor use at 12:00 noon, eastern time June 11, 2020 F EDERAL R ESERVE S TATISTICAL R ELEASE Z.1 Financial Accounts of the United States Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts First Quarter 2020 B OARD OF G OVERNORS OF THE F EDERAL R ESERVE S YSTEM i Recent Developments in Household Net Worth and Domestic Nonfinancial Debt The net worth of households and nonprofits fell to annual rate of 1.6 percent, while mortgage debt $110.8 trillion in the first quarter of 2020. The value of (excluding charge-offs) grew at an annual rate of 3.2 directly and indirectly held corporate equities decreased percent. $7.8 trillion and the value of real estate increased $0.4 trillion. Nonfinancial business debt rose at an annual rate of 18.8 percent in the first quarter of 2020, up from a 2.0 Domestic nonfinancial debt outstanding was $55.9 percent annual rate in the previous quarter. trillion at the end of the first quarter of 2020, of which household debt was $16.3 trillion, nonfinancial business Federal government debt increased 14.3 percent at an debt was $16.8 trillion, and total government debt was annual rate in the first quarter of 2020, up from a 3.8 $22.8 trillion. percent annual rate in the previous quarter. Domestic nonfinancial debt expanded 11.7 percent at State and local government debt expanded at an an annual rate in the first quarter of 2020, up from an annual rate of 0.1 percent in the first quarter of 2020, annual rate of 3.2 percent in the previous quarter.