Showing papers on "Debt published in 2016"
01 Jan 2016
TL;DR: In this article, the authors examined the long-run competitive equilibrium in a growth model and explored the effects on this equilibrium of government debt in a single-commodity world without durable goods.
Abstract: 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. Samuelson [8] has examined the determination of interest rates in a singlecommodity 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 provide for their retirement years by lending to entrepreneurs. After describing 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 government 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 individually, 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. External debt has two effects in the long run, both arising from the taxes needed to finance the interest payments. The taxes directly reduce available lifetime consumption of the individual taxpayer. Further, by reducing his disposable income, taxes reduce his savings and thus the capital stock. Internal debt has both of these effects as well as a further reduction in the capital stock arising from the substitution of government debt for physical capital in individual portfolios.
1,043 citations
TL;DR: In this paper, the authors assess the yield impact of asset purchases within the European Central Bank's (ECB) Securities Markets Programme (SMP) in five euro area sovereign bond markets from 2010-11.
283 citations
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TL;DR: In this article, the optimal structure of govemment debt in a stochastic environment is analyzed, and the empirical part of the paper tests for tax smoothing and then studies state contingencies implemented by some specific securities including nominal debt, long-term bonds, equity, and foreign currency debt.
Abstract: The paper analyzes the optimal structure of govemment debt in a stochastic environment. In a model with distortionary taxes, the govemment should smooth tax rates over states of nature as well as over time. Govemment liabilities should be structured to hedge against macroeconomic shocks that affect the govemment budget. The optimal structure of govemment liabilities generally includes some "risky" securities which are state-contingent in real terms. The empirical part of the paper tests for tax smoothing and then studies state contingencies implemented by some specific securities including nominal debt, long-term bonds, equity, and foreign-currency debt. (JEL 321)
274 citations
TL;DR: In this article, a tradeoff between banks and capital markets for financing, and the aggregate amount of safe liquidity, is discussed, where the trade-off determines firms' choices between bank and markets for finance.
Abstract: Banks produce short-term debt for transactions and storing value. The value of bank money must not vary over time so agents can easily trade this debt at par. This requires that no agent finds it profitable to produce costly private information about the bank's loans. To produce safe liquidity banks choose loans with high such costs. Capital markets cannot produce substitutes for bank money because they involve information revelation. They produce risky liquidity. This trade-off determines firms' choices between banks and capital markets for financing, and the aggregate amount of safe liquidity.
239 citations
TL;DR: An initial taxonomy of technical debt types is proposed, a list of indicators that can be used to find technical debt are created, and the current state of art on technical debt is analyzed to identify topics where new research efforts can be invested.
Abstract: ContextThe technical debt metaphor describes the effect of immature artifacts on software maintenance that bring a short-term benefit to the project in terms of increased productivity and lower cost, but that may have to be paid off with interest later. Much research has been performed to propose mechanisms to identify debt and decide the most appropriate moment to pay it off. It is important to investigate the current state of the art in order to provide both researchers and practitioners with information that enables further research activities as well as technical debt management in practice. ObjectiveThis paper has the following goals: to characterize the types of technical debt, identify indicators that can be used to find technical debt, identify management strategies, understand the maturity level of each proposal, and identify what visualization techniques have been proposed to support technical debt identification and management activities. MethodA systematic mapping study was performed based on a set of three research questions. In total, 100 studies, dated from 2010 to 2014, were evaluated. ResultsWe proposed an initial taxonomy of technical debt types, created a list of indicators that have been proposed to identify technical debt, identified the existing management strategies, and analyzed the current state of art on technical debt, identifying topics where new research efforts can be invested. ConclusionThe results of this mapping study can help to identify points that still require further investigation in technical debt research.
227 citations
TL;DR: The authors found that firms typically classified as constrained do not actually behave as if they were constrained: they have no trouble raising debt when their demand for debt increases exogenously and use the proceeds of equity issues to increase payouts to shareholders.
Abstract: Financial constraints are fundamental to empirical research in finance and economics. We propose two tests to evaluate how well measures of financial constraints actually capture constraints. We find that firms typically classified as constrained do not actually behave as if they were constrained: they have no trouble raising debt when their demand for debt increases exogenously and use the proceeds of equity issues to increase payouts to shareholders. Our evidence suggests that extant findings that have been attributed to constraints may instead reflect differences in the growth and financing policies of firms at different stages of their life cycles.
205 citations
TL;DR: Cancer survivors who were younger, had lower incomes, and had public health insurance were more likely to go into debt or file for bankruptcy, compared to those who were older, had higher incomes and had private insurance, respectively.
Abstract: The rising medical costs associated with cancer have led to considerable financial hardship for patients and their families in the United States. Using data from the LIVESTRONG 2012 survey of 4,719 cancer survivors ages 18–64, we examined the proportions of survivors who reported going into debt or filing for bankruptcy as a result of cancer, as well as the amount of debt incurred. Approximately one-third of the survivors had gone into debt, and 3 percent had filed for bankruptcy. Of those who had gone into debt, 55 percent incurred obligations of $10,000 or more. Cancer survivors who were younger, had lower incomes, and had public health insurance were more likely to go into debt or file for bankruptcy, compared to those who were older, had higher incomes, and had private insurance, respectively. Future longitudinal population-based studies are needed to improve understanding of financial hardship among US working-age cancer survivors throughout the cancer care trajectory and, ultimately, to help stakeho...
200 citations
01 Jan 2016
TL;DR: The food price crisis severely affected most of the Latin American countries in terms of infla tion, especially food inflation, and the region was considered relatively stable and capable of absorbing exter nal shocks, thanks to its higher foreign exchange liquidity; decreased public sector and external borrowing needs; exchange rate flexibility; lower exposure to currency, interest rate, and rollover risks in public sector debt portfolios; and improved access to local-currency loans as mentioned in this paper.
Abstract: Since the late 1980s, almost all Latin American countries have adopted a series of far-reaching economic reforms, especially trade, financial, and capital account liberalization. Increased economic openness has gone hand in hand with large financial inflows?particularly in the first half of the 1990s?and has brought new sources of economic growth. As a result, economies grew, inflation declined, and there was a big surge in foreign cap ital inflows. Although overall growth slowed after 1995, the region has expe rienced strong growth in the past five years, the best sustained performance since the 1970s. With the exception of a handful of countries, this economic growth has been accompanied by relatively modest inflation. Despite these positive results, virtually all Latin American countries share similar problems: uneven economic growth, unacceptably high poverty and malnutrition rates, and lagging agricultural growth. More than 60 percent of the region's poor live in rural areas, where slow economic growth, unequal distribution of assets, inadequate public investment and public services, and vulnerability to natural and economic shocks are major policy issues. The 2007-08 food price crisis exacerbated these problems. Prior to the cri sis, the region was considered relatively stable and capable of absorbing exter nal shocks, thanks to its higher foreign exchange liquidity; decreased public sector and external borrowing needs; exchange rate flexibility; lower exposure to currency, interest rate, and rollover risks in public sector debt portfolios; and improved access to local-currency loans. Nevertheless, the food price cri sis severely affected most of the Latin American countries in terms of infla tion, especially food inflation.
199 citations
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TL;DR: In this paper, the authors used U.S. data from 1929 to 2015 to show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t and t+1.
Abstract: Using U.S. data from 1929 to 2015, we show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t and t+1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. When credit risk is aggressively priced, spreads subsequently widen. The timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t-2 also forecasts a change in the composition of external finance: Net debt issuance falls in year t, while net equity issuance increases, consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this paper suggests that investor sentiment in credit markets can be an important driver of economic fluctuations.
197 citations
TL;DR: In this article, the authors examined whether financial market development promotes the deployment of renewable energy on a global scale and found that countries with well-developed financial markets experience growth in the renewable energy sector due to easier access to external financing.
183 citations
TL;DR: Focusing on the mortgage defaults and evictions crisis in Spain, it is argued that more attention needs to be paid to how funnelling land‐related capital flows goes hand in hand with signing off significant parts of future labour, decisionmaking capacity and well‐being to mortgage debt repayments.
Abstract: The paper expands the conceptual framework within which we examine mortgage debt by reconceptualising mortgages as a biotechnology: a technology of power over life that forges an intimate relationship between global financial markets, everyday life and human labour. Taking seriously the materiality of mortgage contracts as a means of forging new embodied practices of financialisation, we urge for the need to move beyond a policy- and macroeconomics-based analysis of housing financialisation. We argue that more attention needs to be paid to how funnelling land-related capital flows goes hand in hand with signing off significant parts of future labour, decisionmaking capacity and well-being to mortgage debt repayments. The paper offers two key insights. First, it exemplifies how macroeconomic and policy changes could not have led to the financialisation of housing markets without a parallel biopolitical process that mobilised mortgage contracts to integrate the social reproduction of the workforce into speculative global real-estate practices. Second, it expands the framework of analysis of emerging literature on financialisation and subjectification. Focusing on the mortgage defaults and evictions crisis in Spain, we document how during Spain's 1997-2007 real-estate boom the promise of mortgages as a means to optimise income and wealth enrolled livelihoods into cycles of global financial and real-estate speculation, as home security and future wealth became directly dependent on the fluctuations of financial products, interest rates and capital accumulation strategies rooted in the built environment. When, after 2008 unemployment escalated and housing prices collapsed, mortgages became a punitive technology that led to at least 500 000 foreclosures and over 250 000 evictions in Spain.
TL;DR: In this article, the authors studied the effect of relaxing the central government's fiscal rules on local governments in Italy and found that relaxing them increases deficits and lowers taxes. But the effect is larger if the mayor can be reelected, the number of parties is higher, and voters are older.
Abstract: Fiscal rules are laws aimed at reducing the incentive to accumulate debt, and many countries adopt them to discipline local governments. Yet, their effectiveness is disputed because of commitment and enforcement problems. We study their impact applying a quasi-experimental design in Italy. In 1999, the central government imposed fiscal rules on municipal governments, and in 2001 relaxed them below 5,000 inhabitants. We exploit the before/after and discontinuous policy variation, and show that relaxing fiscal rules increases deficits and lowers taxes. The effect is larger if the mayor can be reelected, the number of parties is higher, and voters are older. (JEL E62, H71, H72, H74, R51)
TL;DR: This article showed that patents are pledged as collateral to raise significant debt financing, and that the pledgeability of patents contributes to the financing of innovation, and showed that patent companies raised more debt and spent more on R&D, when creditor rights to patents strengthened.
Abstract: I show that patents are pledged as collateral to raise significant debt financing, and that the pledgeability of patents contributes to the financing of innovation. In 2013, 38% of US patenting firms had pledged their patents as collateral at some point, and these firms performed 20% of R&D and patenting in Compustat. Employing court decisions as a source of exogenous variation in creditor rights, I show that patenting companies raised more debt, and spent more on R&D, when creditor rights to patents strengthened. Subsequently, these companies exhibited a gradual increase in patenting output.
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TL;DR: In this paper, the authors quantify the gains from regulating banks' maturity transformation in an infinite horizon model of banks which finance long-term assets with non-tradable debt.
Abstract: We quantify the gains from regulating banks’ maturity transformation in an infinite horizon model of banks which finance long-term assets with non-tradable debt. Banks choose the amount and maturity of their debt trading off investors’ preference for short maturities with the risk of systemic crises. As in Stein (2012), pecuniary externalities make unregulated debt maturities inefficiently short. The assessment is based on the calibration of the model to Eurozone banking data for 2006. Lengthening the average maturity of wholesale debt from its 2.8 months to 3.3 months would produce welfare gains with a present value of euro 105 billion.
TL;DR: Using US Department of Justice data on local political corruption, this article found that firms in more corrupt areas hold less cash and have greater leverage than firms in less corrupt areas, and that the association between corruption and leverage is largest among firms that operate primarily around their headquarters.
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TL;DR: In this paper, the authors show that there is a "flypaper effect" of large-scale asset purchases, where the transmission of unconventional monetary policy to interest rates and origination volumes depends crucially on the assets purchased and degree of segmentation in the market.
Abstract: Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how these programs affect the real economy. Using rich borrower-linked mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the assets purchased and degree of segmentation in the market. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-eligible mortgage originations significantly more than the origination of GSE-ineligible mortgages. In contrast, QE2’s focus on purchasing Treasuries did not have such differential effects. We find that the Fed’s purchase of MBS (rather than exclusively Treasuries) during QE1 resulted in an additional $600 billion of refinancing, substantially reducing interest payments for refinancing households, leading to a boom in equity extraction, and increasing consumption by an additional $76 billion. This de facto allocation of credit across mortgage market segments, combined with sharp bunching around GSE eligibility cutoffs, establishes an important complementarity between monetary policy and macroprudential housing policy. Our counterfactual simulations estimate that relaxing GSE eligibility requirements would have significantly increased refinancing activity in response to QE1, including a 20% increase in equity extraction by households. Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise.
TL;DR: In this paper, the authors review the literature which explains why and under which circumstances governments accumulate more debt than it would be consistent with optimal fiscal policy and discuss numerical rules or institutional designs which might lead to a moderation of these distortions.
Abstract: This chapter critically reviews the literature which explains why and under which circumstances governments accumulate more debt than it would be consistent with optimal fiscal policy. We also discuss numerical rules or institutional designs which might lead to a moderation of these distortions.
TL;DR: The concept of the "repo trinity" was introduced by as mentioned in this paper, which captures a set of policy objectives that central banks outlined after the 1998 Russian crisis, the first systemic crisis of collateral-based finance, connecting financial stability with liquid government bond markets and free repo markets.
Abstract: In its capacity as debt issuer, the state has played a growing role in financial life over the last 30 years. To examine this role and connect it to shadow banking, the paper develops the concept of the ‘repo trinity’, which captures a set of policy objectives that central banks outlined after the 1998 Russian crisis, the first systemic crisis of collateral-based finance. The repo trinity connected financial stability with liquid government bond markets and free repo markets. It further reinforced the dominance of the US government bond market as institutional template for states adjusting to a world of independent central banks, market-based financing and global competition for liquidity. Central banks and the Financial Stability Board recognized the impossible nature of the trinity after 2008, attributing cyclical leverage (financial instability) and elusive liquidity in collateral markets to deregulated repo markets, markets systemic to shadow banking. The new approach triggered radical changes in crisis central banking but has not powered significant regulatory interventions in the absence of an alternative mode of organizing government bond markets.
TL;DR: The increasing costs of higher education and corresponding rise in student loan debt are creating a new form of stratification for recent cohorts of young adults, and that student loans debt may be a new mechanism by which racial economic disparities are inherited across generations.
Abstract: Taking out student loans to assist with the costs of postsecondary schooling in the US has become the norm in recent decades. The debt burden young adults acquire during the higher education process, however, is increasingly stratified with black young adults holding greater debt burden than whites. Using data from the NLSY 1997 cohort, we examine racial differences in student loan debt acquisition and parental net wealth as a predictor contributing to this growing divide. We have four main results. First, confirming prior research, black young adults have substantially more debt than their white counterparts. Second, we find that this difference is partially explained by differences in wealth, family background, postsecondary educational differences, and family contributions to college. Third, young adults’ net worth explain a portion of the black–white disparity in debt, suggesting that both differences in accumulation of debt and ability to repay debt in young adulthood explain racial disparities in debt. Fourth, the black–white disparity in debt is greatest at the highest levels of parents’ net worth. Our findings show that while social and economic experiences can help explain racial disparities in debt, the situation is more precarious for black youth, who are not protected by their parents’ wealth. This suggests that the increasing costs of higher education and corresponding rise in student loan debt are creating a new form of stratification for recent cohorts of young adults, and that student loan debt may be a new mechanism by which racial economic disparities are inherited across generations.
TL;DR: In this article, the optimal portfolio choice of a sovereign that is subject to liquidity and productivity shocks is modeled by solving a contracting game between sovereign and international lenders, which rationalizes the complementarity between debt and reserves.
TL;DR: In this article, the authors investigate how the structure of the mortgage market influences macroeconomic dynamics, using a general equilibrium framework with prepayable debt and a limit on the ratio of mortgage payments to income.
Abstract: I investigate how the structure of the mortgage market influences macroeconomic dynamics, using a general equilibrium framework with prepayable debt and a limit on the ratio of mortgage payments to income. This realistic environment amplifies transmission from interest rates into debt, house prices, and economic activity. Monetary policy can more easily stabilize inflation due to this amplification, but contributes to larger fluctuations in credit growth. A relaxation of payment-to-income standards appears essential to the recent boom. A cap on payment-to-income ratios, not loan-to-value ratios, is the more effective macroprudential policy for limiting boom-bust cycles.
TL;DR: In this article, the effects of exposure to financial training on debt outcomes in early adulthood among a large and representative sample of young Americans were studied using a flexible event study approach, finding that both mathematics and financial education, by and large, decrease reliance on nonstudent debt and improve repayment behavior.
Abstract: Young Americans are heavily reliant on debt and have clear financial literacy shortcomings In this paper, we study the effects of exposure to financial training on debt outcomes in early adulthood among a large and representative sample of young Americans Variation in exposure to financial training comes from statewide changes in high school graduation requirements Using a flexible event study approach, we find that both mathematics and financial education, by and large, decrease reliance on nonstudent debt and improve repayment behavior Economics training, on the other hand, increases both the likelihood of holding outstanding debt and the prevalence of repayment difficulties
01 Jan 2016
TL;DR: The authors found that interest rates remained high and volatile for four decades after the Glorious Revolution, partly due to wars and instability, and British interest rates co-moved with those in Holland until around 1780.
Abstract: ernment debt, and financial development in Britain (1690-1790) and find that interest rates remained high and volatile for four decades after the Glorious Revolution, partly due to wars and instability; British interest rates co-moved with those in Holland; Debt per capita remained lower in Britain than in Holland until around 1780; and Britain did not borrow at lower rates than European countries with more limited protection of property rights. We conclude that, in the short run, institutional reforms are not rewarded by financial markets.
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TL;DR: Barro and Feldstein this paper showed that for a growing economy, an increase in per capita debt will generate net wealth if the rate of growth is greater than the interest rate, provided one or both of the intergenerational transfer motives is operative.
Abstract: The effects of national debt on real economic activity has been a recurring topic in the literature on macroeconomic policy analysis since the time of Adam Smith. The problem is usually stated as follows: for a given level of government spending, is the economy sensitive to the financing mix between tax and debt? Historically, attention has focused on the question of whether or not individuals perceive government bonds as net wealth, the link between wealth and real activity being taken as given. The main point of debate is well established. The issue of bonds raises private assets by the full value of the bonds. The corresponding tax liabilities for interest payments and retirement of the debt extend indefinitely into the future. The perception of bonds as net wealth would then appear to depend on the length of the individual's optimization horizon. The most recent contribution to this debate was made by Robert Barro (1974) in which he argued that, despite the limitation of finite lives, bonds will not be regarded as net wealth in a system characterized by operative intergenerational transfers. The essence of his argument is that inclusion of a bequest motive effectively converts a finite horizon into an infinite one. In that paper, Barro acknowledged a potential limitation on his proof of the neutrality result; it was only valid for bonds that are redeemed at a known point in the future. This limitation was raised again in a subsequent exchange with Martin Feldstein in which Barro (1976) agreed that for a growing economy, an increase in steady-state per capita debt will generate net wealth if the rate of growth is greater than the interest rate.' However, he argued that such a steadystate growth situation would not be consistent with rational utility-maximizing behavior. The main theme of this paper is that the literature has focused attention on the wrong question. The real effects of national debt are independent of whether or not individuals perceive the debt as net wealth. The correct question is whether or not changes in the level of debt force individuals into patterns of intertemporal consumption that they are unable to neutralize by adjustments in their portfolio behavior. Viewing neutrality in this light leads to some reinterpretation of the conditions under which neutrality is likely to hold. My analysis starts where Barro and Feldstein leave off. Within the framework of the overlapping-generations model with gift and bequest motives, I show that steady-state equilibrium growth is consistent with a growth rate in excess of the interest rate indeed, without specific knowledge of the parameters of the economy, there are no a priori grounds on which to expect any particular relationship between the growth and interest rates. More importantly, so long as it is valid to view the aggregate economy as behaving like a composite individual, changes in the steady-state level of government debt are neutral regardless of which relationship prevails, provided one or the other of the intergenerational transfer motives is operative. I will refer to this as the extended neutrality theorem. Section I presents an analysis of steadystate growth with gift and bequest behavior. The steady-state growth path is shown to lie above the Golden Rule solution if the gift
TL;DR: In this paper, the authors hypothesize that the choice to obtain a financial statement audit provides external financiers with incremental information about the firm, which helps reduce information asymmetry and financing frictions.
01 Jan 2016
TL;DR: In this article, the authors examined the relationship between managerial ownership structure and at-issue yield spreads on corpo rate bonds and found that managers' stock options have a larger effect on yield spreads than stock ownership.
Abstract: This article examines managerial ownership structure and at-issue yield spreads on corpo rate bonds. There is a positive relation between managerial ownership and borrowing costs, and this relation is weaker at higher levels of ownership. In addition, managerial stock op tions have a larger effect on yield spreads than stock ownership. These effects exist after controlling for firm and bond characteristics, and are robust to endogeneity and sample selection concerns. The evidence suggests that rational bondholders price new debt issues using the information about a firm's future risk choices contained in managerial incentive structures, and that lenders anticipate higher risk-taking incentives from managerial stock options than from equity ownership.
TL;DR: In this paper, the authors examine the public debt management problem with respect to the maturity mix of new issues in a mean-variance framework and show that the room for long tactical positions on the long-term bond is actually narrower than predicted by rules of thumb based on Sharpe-like ratios.
TL;DR: In this paper, the authors show that the bank responded to a legal reform that exogenously reduced collateral values by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring borrower delinquency on outstanding claims.
Abstract: We show that collateral plays an important role in the design of debt contracts, the provision of credit, and the incentives of lenders to monitor borrowers. Using a unique data set from a large bank containing timely assessments of collateral values, we find that the bank responded to a legal reform that exogenously reduced collateral values by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring borrower delinquency on outstanding claims. We thus explain why banks are senior lenders and quantify the value of claimant priority.
01 Jan 2016
TL;DR: De Leeuw et al. as mentioned in this paper developed and presented measures of the real value of federal government net debt, offering as a byproduct associated measures of net worth, and applied these measures to develop adjusted figures for the recently revised official high-employment budget surplus and deficit.
Abstract: Much again has recently been made of the purportedly large government debt and deficits. To some, the sheer magnitude of the federal debt, passing $1.3 trillion in 1983, suggests the danger of some kind of national bankruptcy. To others, the large and growing budget deficits, which have now reached 6 percent of Gross National Product, are a harbinger of a new acceleration of inflation. Fiscal policy, it is further argued, has been incessantly stimulative, as is indicated by the movement to deficit of even the highemployment budget in the last two decades. A number of recent papers have pointed to the need for adjustment of conventional measures of government debt and, in particular, the deficit.' As is of course well known, in its failure to distinguish between current and capital expenditures, the federal budget is widely at variance with prevailing accounting practice for private business. Application of government accounting methods to the private sector would move many major American corporations toward deficit. Conversely, conventional private accounting methods would generally move government accounts toward surplus. But of further and critical importance, in government accounts as in private accounts, inflation plays vast tricks. If we are to avoid the cardinal economic sin of money illusion, we must look at real market values of debt and real deficits that correspond to changes in the real value of debt. In the first substantive section of this paper, therefore, we develop and present measures of the real value of federal government net debt, offering as a byproduct associated measures of net worth.2 The net revaluations calculated in developing a time-series of real net federal debt are applied to develop a series of "adjusted" budget surpluses and deficits. The second substantive section of the paper entails an application of these measures to develop adjusted figures for the recently revised official high-employment budget surplus and deficit.3 The official and adjusted series for the high-employment budget are then related to changes in real Gross National Product and the rate of unemployment. It is found that lagged series of the official high-employment budget surplus and, even more clearly, our adjusted measures taking into account the impact of inflation and changing interest rates on the real value of the debt, show clear and sharp negative relations with the real path of the economy. With increasing inflation, a balanced official high-employment budget proved less and less consistent with the maintenance of high employment or adequate economic growth. Recent declines in real GNP and increases in unemployment are remarkably closely associated with a substantial move to surplus in the adjusted high-employment budgets. *William R. Kenan Professor of Economics, Northwestern University, Evanston, IL 60201, and Assistant Professor of Economics, University of Illinois, Chicago, IL 60680, respectively. We are indebted to Elizabeth Fogler of the Flow of Funds Division of the Federal Reserve Board, and to John J. Seater, W. Michael Cox, and Eric Hirschhorn for guidance through published and unpublished data. We are particularly indebted to Laurence Kotlikoff for suggesting that earlier work of Eisner (1980) be updated for use by the Council of Economic Advisers. We are further indebted to the Council for financial support and to the National Science Foundation (grant SES-7717555) for support of the initial research. We are grateful to Otto Eckstein, H.S. Houthakker, and Allen Sinai for comments on an earlier draft of part of this paper, and to Moses Abramovitz, Michael Boskin, E. Cary Brown, Paul Evans, Benjamin Friedman, Robert J. Gordon, Bert G. Hickman, Frank de Leeuw, Frederic Mishkin, Dale T. Mortensen, and George Neumann for comments on later versions, and to anonymous referees. We alone are responsible for its contents. 'See, for example, Michael Boskin (1982), Michael Cox and Eric Hirschhom (1983), Economic Report of the President (1982), Brian Horrigan and An's Protopapadakis (1982), Rudolph Penner (1982), Richard Ruggles and Nancy Ruggles (1982), and John Seater (1981). 2 Measures including state and local government are presented in Appendix A. 3See Frank de Leeuw and Thomas Holloway (1982).
TL;DR: In this paper, the menu of assets legally accepted as collateral was enlarged to include movable assets (e.g., machinery and equipment), and generalized difference-in-differences tests show that firms operating more movable asset borrowed more as a result.
Abstract: Recent reforms across Eastern European countries have given more flexibility and information to parties to engage in secured debt transactions. The menu of assets legally accepted as collateral was enlarged to include movable assets (e.g., machinery and equipment). Generalized difference-in-differences tests show that firms operating more movable assets borrowed more as a result. Those firms also invested more, hired more, and became more efficient and profitable following the changes in the contracting environment. The financial deepening we document triggered important reallocation effects: firms affected by the reforms increased their share of fixed assets and employment in the economy.