Search Results (42)

This paper examines whether government debt financing crowds out private consumption in South Africa or whether household behaviour is consistent with Ricardian equivalence. Using quarterly data from 1960Q1 to 2025Q1, the study employs a Bayesian time-varying parameter framework that accommodates non-stationarity, structural change, and evolving fiscal transmission mechanisms, and is complemented by a Markov-switching Bayesian VAR as a robustness check. All variables are expressed relative to GDP to avoid scale effects, and inference is based on posterior distributions. The results reveal pronounced state dependence in the debt–consumption relationship. In earlier decades, increases in the debt-to-GDP ratio are associated with statistically meaningful declines in the private consumption share, consistent with crowding-out or precautionary behaviour under weaker fiscal credibility. Over time, however, this negative association weakens and converges toward neutrality, with post-2010 estimates indicating no significant effect of debt on consumption. Conditioning on fiscal stance and financial conditions shows that debt does not exert an independent influence on consumption once government expenditure, tax revenue, and interest rates are taken into account. A constant-parameter Bayesian benchmark masks these dynamics, producing an average effect close to zero. Evidence from a Markov-switching Bayesian VAR similarly finds no persistent regime-specific crowding-out effects. Overall, the findings suggest that observed debt–consumption linkages in South Africa operate primarily through broader fiscal and macroeconomic conditions rather than debt accumulation itself, highlighting the importance of fiscal credibility and policy composition. Full article

Two main perspectives exist regarding the interaction between fiscal deficits and expansionary monetary policy. The first perspective argues that fiscal deficits raise interest rates, thereby increasing interest payments and complicating monetary stabilization efforts. The second posits that expansionary monetary policy enhances nominal GDP growth, which in turn reduces the government debt-to-GDP ratio and strengthens the fiscal position. Using panel data from the IMF World Economic Outlook covering advanced economies between 1980 and 2025, this study empirically evaluates which perspective is more consistent with observed data, while accounting for the dynamics of tax revenues, government expenditures, interest rates, and nominal GDP growth. Empirical evidence indicates that moderate monetary expansion—raising nominal GDP—tends to stabilize budget deficits, as government revenues generally outpace expenditures and interest rates do not increase proportionally with nominal growth. These results are further illustrated through case studies of Greece, Italy, Portugal, Spain, Japan, the United Kingdom, and the United States. Full article

We investigate the broad economic impact of accession in the case of 13 countries who joined the European Union starting with 2004, by comparing them with both EU and non-EU countries. Using 25 years of data, we document significant post-accession improvements in productivity and/or GDP per capita. Overall, these countries outperformed in terms of growth and productivity the European countries that never joined the EU. The newly admitted countries also out-borrowed non-EU countries in order to finance their transition and their subsequent economic growth. We also document a significant short-term, inverse relationship between the quality of governance and total factor productivity, on the one hand, and the ratio of debt-to-GDP on the other hand. This suggests that increases in the level of indebtedness could be driven by poor political governance and weak productivity. Borrowing appears to represent a compensatory, stop-gap measure rather than the result of sound economic strategy. Full article

Egypt has experienced a sharp rise in external debt over the past decade, increasing from USD 55.8 billion in 2015 to over USD 165.3 billion by 2023. Despite maintaining a debt-to-GDP ratio within internationally accepted thresholds (approximately 45% in 2023), the country faces mounting economic distress, including foreign exchange shortages, currency depreciation, and rising debt-servicing burdens. This study argues that Egypt’s crisis stems not from excessive borrowing but from ineffective debt management, particularly the misalignment between debt maturities and the economic returns of financed projects. Using annual data from 2010 to 2023—a period deliberately selected to capture Egypt’s post-2011 political and economic transition—the analysis applies a Vector Autoregression (VAR) model and Granger causality test to explore short-term interactions between short-term and long-term external debt, the exchange rate, and foreign reserves. While the small sample size limits long-term econometric inference, it provides meaningful insights into short-term debt dynamics and liquidity pressures characteristic of Egypt’s current economic phase. The results show that short-term debt exerts significant depreciative pressure on the currency, while long-term debt weakly undermines reserves when tied to non-revenue-generating projects. Policy recommendations emphasize improving debt maturity alignment, enhancing transparency, and linking debt servicing to productive investments. Full article

In the existing literature, targeting rules are typically determined separately for monetary and fiscal policy. This article proposes a framework for determining targeting rules that account for the policy mix of both monetary and fiscal policy. The aim of this study is to compare selected optimization methods used to derive targeting rules as solutions to a constrained minimization problem. The constraints are defined by a model that incorporates a monetary and fiscal policy mix. The optimization methods applied include the linear–quadratic regulator, Bellman dynamic programming, and Euler’s calculus of variations. The resulting targeting rules are solutions to a discrete-time optimization problem with a finite horizon and without discounting. In this article, we define targeting rules that take into account the monetary and fiscal policy mix. The derived rules allow for the calculation of optimal values for the interest rate and the balance-to-GDP ratio, which ensure price stability, a stable debt-to-GDP ratio, and the desired GDP growth dynamics. It can be noted that all the optimization methods used yield the same optimal vector of decision variables, and the specific method applied does not affect the form of the targeting rules. Full article

This study applied supervised machine learning algorithms to macro-fiscal panel data from 20 EU member states (2000–2024) to model and predict fiscal stress episodes in the Eurozone. Conventional frameworks for assessing public debt sustainability often rely on static thresholds and linear dynamics, limiting their ability to capture the complex, non-linear interactions in fiscal data. To address this, we implemented logistic regression, support vector machines, and XGBoost classifiers using core fiscal indicators such as debt-to-GDP ratio, primary balance, GDP growth, interest rates, and inflation. The models were evaluated using time-aware cross-validation, with XGBoost delivering the highest predictive accuracy but showing some signs of overfitting. We highlighted the interpretability of logistic regression and applied SHAP values to enhance transparency in the tree-based models. While limited by using annual data, we discuss the potential value of incorporating real-time or high-frequency fiscal indicators. Our results underscore the practical relevance of AI-enhanced early warning systems for fiscal surveillance and support their integration into institutional monitoring frameworks. Full article

The increasingly observable financial vulnerability of households in emerging market countries makes it imperative to investigate the factors influencing it. Considering that China stands as a representative of emerging market economies, analyzing the factors influencing household financial vulnerability in China presents great reference significance for the sustainable development of households in emerging market countries. Using data from the China Household Finance Survey (CHFS) household samples, this paper presents the regional distribution of households with financial vulnerability in China. Utilizing machine learning (ML), this research examines the factors that influence household financial vulnerability in China and determines the most significant ones. The results reveal that households with financial vulnerability in China takes up a proportion of more than 63%, and household financial vulnerability is lower in economically developed coastal regions than in medium and small-sized cities in the central and western parts of China. The analysis results of the SHAP method show that the debt leverage ratio of a household is the most significant feature variable in predicting financial vulnerability. The ALE plots demonstrate that, in a household, the debt leverage ratio, the age of household head, health condition, economic development and literacy level are significantly nonlinearly related to financial vulnerability. Heterogeneity analysis reveals that, except for household debt leverage and insurance participation, the key characteristic variables exerting the most pronounced effect on financial fragility differ between urban and rural households: household head age for urban families and physical health status for rural families. Furthermore, digital financial inclusion and social security exert distinct impacts on financial vulnerability, showing significantly stronger effects in high per capita GDP regions and low per capita GDP regions, respectively. These findings offer valuable insights for policymakers in emerging economies to formulate targeted financial risk mitigation strategies—such as developing household debt relief and prevention mechanisms and strengthening rural health security systems—and optimize policies for household financial health. Full article

The ageing of the population has negative effects on the gross domestic product (GDP), influencing various economic and social aspects. These effects, in turn, contribute to an increase in the debt-to-GDP ratio, raising concerns about the long-term sustainability of public debt. The objective of our study is to evaluate the possible dynamics of debt sustainability with a certain level of probability. The analysis employs the stochastic modelling of risk factors influencing the debt-to-GDP ratio, particularly emphasising the economic consequences of population ageing. Using advanced risk management techniques, we aim to provide a robust assessment of how future demographic outlooks impact debt sustainability. Full article

The main goal of the first-generation expenditure rules was to ensure fiscal discipline: preserving a sound fiscal framework and public debt sustainability. Regarding this goal, analytically as well as empirically, limiting the share of public expenditure in GDP would be more appropriate in case of weak potential economic growth or if the public expenditure-to-GDP ratio is high. On the contrary, limiting the variation of public expenditure would be more appropriate for countries with high potential economic growth or with a weak public expenditure-to-GDP ratio. The second goal of expenditure rules is to contribute to sustaining economic activity. Regarding this goal, limiting the level of public expenditure appears as more favorable than limiting the variation of public expenditure. Indeed, a rule in terms of variation could hamper economic growth, especially for countries with a high public expenditure-to-GDP ratio. Full article

Since the early 1980s, there have been a number of principally empirical studies of the impact of government budget deficits on interest rates that have typically tested the hypothesis that larger deficits raise interest rates. However, in more recent years, this topic has received far less attention. Accordingly, this study seeks to “update” the findings of such studies and to do so for the dominant North American economies of Canada and the U.S. Furthermore, in the pursuit of further insights into interest rates, the present study also investigates an effectively heretofore overlooked variable that arguably also might influence interest rates, namely, economic freedom. Finally, given the increased upward trend of government debt (relative to GDP) in recent years in Canada and the U.S., this study investigates the interest rate impact of rising national debt-to-GDP ratios. For the 1995–2024 period (and also in one estimate for the 1985–2001 period), this exploratory study finds compelling evidence (1) that the real interest rate yield on 10-year Treasuries in Canada and the real interest rate yield on 10-year U.S. Treasury notes are increasing functions of the central government budget deficits in both Canada and the U.S., respectively, and (2) the real interest rate yields on 10-year Treasuries in Canada and 10-year U.S. Treasury notes are both decreasing functions of economic freedom in Canada and the U.S., respectively. On the other hand, regarding the impact of a higher national debt-to-GDP ratio on the real ten-year Treasury yield, there is only very mixed support for an impact, with support for its impact coming from the Canadian estimates but no support whatsoever coming from the U.S. estimates. Full article

The purpose of this paper is to show how the self-exciting threshold autoregressive (SETAR) model might be a suitable econometric framework for characterizing the dynamics of the US public debt/GDP ratio after the Bretton Woods collapse. Our preferred SETAR specifications are capable of capturing the main stylized facts of the US public debt/GDP ratio between 1974 and 2024. In addition, the estimated SETAR models are consistent with theoretical frameworks that look to explain the behavior of the US public debt/GDP ratio before and after the Global Financial Crisis (GFC). Finally, under the assumption of public debt/GDP ratio stationarity, for which we find only limited and inconclusive evidence, this paper provides some arguments for why previous studies, which use the exponential smooth threshold autoregressive (ESTAR) models, logistic smooth threshold autoregressive (LSTAR) models or SETAR-type models for the first differences of the US public debt/GDP ratio, are potentially misspecified on both econometric and economic grounds. Full article

Public debt is determined by borrowings undertaken by a government to finance its short- or long-term financial needs and to ensure that macroeconomic objectives are met within budgetary constraints. In Romania, public debt has been on an upward trajectory, a trend that has been further exacerbated in recent years by the COVID-19 pandemic. Additionally, a significant non-economic event influencing Romania’s public debt is the war in Ukraine. To analyze this, a stochastic debt sustainability analysis was conducted, incorporating the unique characteristics of Romania’s emerging market into the research methodology. The projections focused on achieving satisfactory results by following two lines of research. The first direction involved developing four scenarios to assess the risks presented by macroeconomic shocks. Particular emphasis was placed on an unusual negative shock, specifically the war in Ukraine, with forecasts indicating that the debt-to-GDP ratio could reach 102% by 2026. However, if policymakers implement discretionary measures, this level could be contained below 88%. The second direction of research aimed to establish the maximum safe limit of public debt for Romania, which was determined to be 70%. This threshold would allow the emerging economy to manage a reasonable level of risk without requiring excessive fiscal efforts to maintain long-term stability. Full article

The average country in Asia–Pacific experiences more natural disasters than average countries of other developing regions. This paper presents stylized facts on natural disasters, human development, and external debt in Asia–Pacific. The paper also contains estimates of the effects that natural disasters have on human development. Controlling for country- and time-fixed effects, the dynamic panel model estimates show that external debt has a mitigating effect on the adverse impacts that natural disasters have on human development; in countries with low external debt-to-GDP ratios, natural disasters significantly decrease the human development index, but not so in countries with high external debt-to-GDP ratios. External debt (i.e., borrowing from abroad) is a financial contract for obtaining resources from abroad (i.e., imports of goods and services). When a country experiencing a natural disaster borrows from abroad to increase imports of goods and services, the population suffers less when a natural disaster strikes. Natural disasters destroy goods and capital (e.g., food, machinery, buildings, and roads) in the countries in which they occur. If imports of goods and services do not increase, then the population has less goods and services to consume following a natural disaster. By increasing imports, which are mirrored on the financial side by an increase in external debt, the population of a country that was struck by a natural disaster can experience consumption smoothing. As the incidence of natural disasters increases globally, a policy recommendation for disaster-prone countries, supported by the empirical results of this paper, is the need for deeper and innovative mechanisms of access to international financing, including reforms in both domestic and international financial systems. The paper’s most significant contribution is the unique lens through which it analyzes the often-studied subject of natural disasters. Rather than looking at disasters as merely adverse events and debt as an unwelcome obligation in isolation, it connects the two and uncovers the paradoxically positive and beneficial role a healthy level of external debt can play in mitigating the adverse effects of these disasters. It provides a fresh perspective, a shift in thinking that may immensely benefit external debt and disaster management policies. Full article

The objective of this study was to examine the potential moderating effects of the relationship between macroeconomic variables and the financial liquidity of enterprises. Given the significance of liquidity for companies and the profound impact of the macroeconomic environment, a research gap was identified in relation to the limited number of studies investigating the influence of macroeconomic factors on corporate liquidity. Additionally, the limited scope of companies surveyed in this area, in terms of sector, size, capital market presence, and the limited range of macroeconomic variables examined were notable. Most importantly, the absence of studies examining moderators of the relationship between macroeconomic factors and liquidity was a significant concern. To this end, two main research questions were formulated. First, what factors moderate the relationship between macroeconomic variables and the financial liquidity of companies? Second, what is the nature of the moderating effects on the relationship between macroeconomic variables and corporate financial liquidity? This research employed panel data analysis on an unbalanced panel comprising 5327 Polish enterprises spanning from 2003 to 2021. The primary analytical technique utilised was linear regression (pooled OLS) with robust standard errors clustered at the firm level. The main results of this study indicate that: (1) debt level, profitability, and the fixed assets to total assets ratio are significant moderators of some of the relationships between macroeconomic variables and corporate liquidity; (2) debt level moderates the relationship between the ratio of internal expenditures on research and development to GDP and financial liquidity, as well as the relationship between inflation rate and liquidity; the relationship is statistically significant and positive only for those enterprises with above-median debt levels; (3) profitability moderates the relationship between the employment coefficient and financial liquidity, as well as the relationship between the inflation rate and liquidity; in the high-profitability group, those relationships are positive, whereas in the low-profitability group, they are negative; (4) the ratio of fixed assets to total assets moderates the relationship between the money supply and corporate financial liquidity; for enterprises with low asset flexibility, there is a negative relationship between the money supply and financial liquidity; conversely, for enterprises with high asset flexibility, there is a positive relationship between the money supply and financial liquidity; (5) the rationale behind these findings can be derived from capital structure theory and financial analysis theory. The results of this study represent a step towards a more comprehensive understanding of the relationship between the macro environment and corporate liquidity, as well as the factors that moderate this relationship from both a microeconomic and a macroeconomic perspective. The findings of this study may also inform policy decisions governing the corporate sector due to a more nuanced understanding of the relationships between macroeconomic factors and corporate liquidity. Full article

This study seeks to investigate the potential effects of the recent pandemic (COVID-19) on capital structure dynamics. The Gulf Cooperation Council (GCC) is a fascinating topic for this study because of its distinct economic characteristics. The analysis draws upon a cross-country dataset covering 208 non-financial listed firms across five GCC countries, with data spanning the years 2010 to 2022. Capital structure is a dependent variable and is measured by total debt to equity, equity multiplier, and short-term debt ratios, while the COVID-19 pandemic, firm size growth, return on assets, tangibility, and growth were applied as independent variables. Using the generalized least squares (GLS) method, findings demonstrated that COVID-19 has a significant and positive influence on debt-to-equity and equity multiplier ratios but a negative one on short-term debt ratio. Thus, non-financial firms increased their debt financing and transferred debt from short-term to long-term funding. In addition, firm-specific factors, such as firm size, tangibility, and macroeconomic factors, such as GDP growth, positively and significantly impact capital financing. Conversely, profitability has a negative relationship with financial leverage. There is a lack of empirical research on how COVID-19 affects the financial structure of non-financial listed companies in GCC nations. Consequently, by filling the previously specified gaps, this study provides proof to support the idea of using debt financing to raise capital for economic recovery. GCC policymakers need to give priority to ensuring that firms have convenient access to inexpensive finance in light of the financial consequences caused by COVID-19. This will guarantee that companies have the resources necessary to bounce back and support economic growth. Full article