Government Financial Assets and Debt Sustainability

Abstract

Do government financial assets help improve public debt sustainability? To answer this question, we assemble a comprehensive dataset on government assets using multiple sources and covering 110 advanced and emerging market economies since the late 1980s. We then use this rich database to estimate the impact of assets on two key dimensions of debt sustainability: borrowing costs and the probability of debt distress. Government financial assets significantly reduce sovereign spreads and the probability of debt crises in emerging economies but not in advanced economies, and the effect varies with asset characteristics, notably liquidity. Government finacial assets also help discriminate countries across the distribution of sovereign spreads, thus signaling information about emerging economies’ creditworthiness.

A Model-based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance

“…The Buffer-stock model of the government reflects the concern that governments may have insufficient buffers in bad times. The model also features a risk premium on government bonds rising in debt, in line with the empirical literature (Gruber and Kamin, 2012;Poghosyan, 2012;D'Agostino and Ehrmann, 2014;Fall and Fournier, 2015;Henao-Arbelaez and Sobrinho, 2017). This raises the marginal cost of a given increase in debt, but also decreases the surplus needed in a debtreduction path.…”

“…The model features rising market pressure when debt is rising. First, the interest rate increases in public debt, in line with empirical evidence (Gruber and Kamin, 2012;Poghosyan, 2012;D'Agostino and Ehrmann, 2014;Fall and Fournier, 2015;Henao-Arbelaez and Sobrinho, 2017). This sensitivity of the interest rate to debt reflects a higher risk premium and can be regarded as the consequence of an excess of supply of government bonds.…”

“…The constant in the risk premium is calibrated with the current debt level and the current interest rate level. The risk premium is a linear function of government debt, where the slope is 1.5 α = , which is in the middle of empirical estimates (Gruber and Kamin, 2012;Poghosyan, 2012;D'Agostino and Ehrmann, 2014;Fall and Fournier, 2015;Henao-Arbelaez and Sobrinho, 2017). For the risk of losing market access, d1 = 3, d2 = 1, d3 = -1 and d = 150%.…”

France

“…The model features rising market pressure when debt is rising. First, the interest rate increases in public debt, with a calibration in line with empirical evidence (Gruber and Kamin 2012; Poghosyan 2012; D'Agostino and Ehrmann 2014; Fall and Fournier 2015;Henao-Arbelaez and Sobrinho, 2017). This sensitivity of the interest rate to debt reflects a higher risk premium, it can be regarded as the consequence of an excess of supply of government bonds.…”

Transformação digital, emprego dos jovens e a Agenda 2063 no Norte de África

“…Por outro lado, os países com balanços mais saudáveis beneficiariam de custos de contração de empréstimos mais vantajosos. De facto, dados recentes mostram que os mercados financeiros têm em conta os ativos do governo e os níveis de endividamento ao decidir o custo da concessão de empréstimos (Hadzi-Vaskov e Ricci, 2016;Henao-Arbelaez e Sobrinho, 2017). No entanto, a melhoria da gestão do balanço só será possível se se dispuser de dados de qualidade e da metodologia adequada para avaliar o valor dos ativos públicos, e desde que os governos concordem em ser sujeitos a um escrutínio mais rigoroso destes elementos.…”