...Set 3 Group Assignment February 2016 1） Assuming that the nominal interest rate, the inflation rate, the real GDP growth and primary deficit remain constant for the next year, we can compute the projected next year end debt as a percentage of GDP by using the equation: dt+1=dt+i-πdt-grdt-st+1 In this case, dt is the public debt (as % of GDP) of 2011, which is 88%; i is the government interest rate 7% according to our assumption; π is the inflation rate, which was 2% if it is held constant constant in the next year; gr is -1%, the real GDP growth; and -st+1 is the primary deficit, which is 3%. Therefore: dt+1=88%+7%-2%×88%--1%×88%+3%=96.28% Thus, the projected next year-end debt (as % of GDP), based upon our assumptions, would be 96.28%. If we decompose the changes in debt-to-GDP ratio into three components, among the 8.28% of debt changes (as % of GDP), 4.4% is due to the real interest rate, 0.88% is coming from the growth, and primary deficit makes a contribution of 3%. The above calculation is shown in Table 1 below. Table 1: Debt to GDP ratio forecast | t=2012 | t=2013 | t=2014 | t=2015 | Inputs | | | | | Primary deficit (% of GDP) | 3 | 3 | 3 | 3 | Interest rate (money market, %) | 7 | 7 | 7 | 7 | Inflation (%) | 2 | 2 | 2 | 2 | Real GDP growth (%) | -1 | -1 | -1 | -1 | Public debt (% of GDP, end of t-1) | 88 | 96.28 | 105.06 | 90.66 | | | | | | Miscellaneous calculations | | | | | Real interest rate (%) |...
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...the debt ceiling as much as he is some of the country's other issues. Buffett this weekend said the $16.4 trillion in debt the country has collected is not the number on which everyone should be focused. "It is not a good thing to have it going up in relation to GDP, that should be stabilized, but the debt itself is not a problem," the CEO of Berkshire Hathaway (NYSE: BRK.A) told CBS' "Sunday Morning" this weekend. Buffett said the country's debt is a "lower percentage of GDP than it was when we came out of World War II. You've got to think about in relation to GDP." Here's why debt-to-GDP is what Buffett watches. Private Briefing Why Debt to GDP Matters The debt-to-GDP ratio is a measure of the country's federal debt in relation to its gross domestic product. By comparing what the country owes to what it produces, the ratio indicates the country's ability to pay its debt; the higher the ratio, the higher the risk of default. The ratio matters because: Rating agencies, such as Fitch, S&P and Moody's, commonly use debt-to-GDP ratios to determine the credit worthiness of a country. Purchasers of a country's debt buy with the assertion they will be paid back on time. In a thriving economy, an elevated debt-to-GDP ratio isn't much of a concern since future earnings portend a country will be able to pay off its debts quickly. In a stagnant economy, a high ratio raises a red flag. Not having a feasible plan in place to address a high debt-to-GDP...
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...Regime-switching effects of debt on real GDP per capita the case of Latin American and Caribbean countries Tsangyao Chang ⁎, Gengnan Chiang Department of Finance, Feng Chia University, Taichung, Taiwan a r t i c l e i n f o a b s t r a c t In this paper, we try to investigate how the debt and real GDP per capita relationship varies with indebtedness levels and other country characteristics in a balanced panel of 21 developing Latin American and Caribbean countries over the period 1992–2006. The empirical results indicate that there exist two threshold values of 32.88% and 55.89%. The latter is lower than the Maastricht criterion and Stability and Growth Pact of a total external Debt per GDP ratio at 60% in the OECD countries. Both thresholds divide our panel into three regimes. In the middle (stimulus) regime, the Debt per GDP ratio has a positive impact on real GDP per capita, which is consistent with the stimulus view (Eisner, 1984). However, the impact becomes negative and consistent with the crowding-out view (Friedman, 1977, 1985) in the left and right (crowding-out) regimes. Based on our findings, we find no supportive evidence for Ricardian view (Barro, 1989). Therefore, our empirical results have important implications for fiscal policymakers in these Latin American and Caribbean countries. © 2011 Elsevier B.V. All rights reserved. Article history: Accepted 13 June 2011 JEL classification: C4 E6 H3 H6 Keywords: Debt per GDP ratio Real GDP per capita Stimulus view...
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...Aggregate price level LRAS SRAS P1 E1 AD1 Y1 YP Potential output Real GDP a. Is Albernia facing a recessionary or inflationary gap? b. Which type of fiscal policy—expansionary or contractionary—would move the economy of Albernia to potential output, YP ? What are some examples of such policies? c. Illustrate the macroeconomic situation in Albernia with a diagram after the successful fiscal policy has been implemented. 1. Solution a. Albernia is facing a recessionary gap; Y1 is less than YP. b. Albernia could use expansionary fiscal policies to move the economy to potential output. Such policies include increasing government purchases of goods and services, increasing government transfers, and reducing taxes. c. Aggregate price level LRAS SRAS P2 P1 E2 E1 AD2 AD1 Y1 YP Real GDP Potential output Recessionary gap S-169 MACROECONOMICS 29 13 ECONOMICS chapter: S169-S182_Krug2e_Macro_PS_Ch13.qxp 2/25/09 8:02 PM Page S-170 S-170 MACROECONOMICS, CHAPTER 13 ECONOMICS, CHAPTER 29 2. The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1, and the aggregate price level is P1. You have been hired as an economic consultant to help the economy move to potential output, YP. Aggregate price level P1 LRAS SRAS E1 AD1 Potential output YP Y1 Real GDP a. Is Brittania facing a recessionary or inflationary gap? b. Which type of fiscal...
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...world wars, oil crises and current financial and economic crises. The objective in seeking deficit financing is to finance the shortfall between government expenditures and tax receipts. Tax increases are not politically palatable. Governments often resort to deficit financing when other components of GDP such as private consumption decline during recessionary periods. Such deficits, if undertaken for a short period with an action plan to create equivalent surplus in near future, could reverse decline in real GDP and stimulate growth in real GDP for the benefit of citizens of the nation. Structural deficits are indicative of inability to reduce entrenched government expenses. The sustainable level of accumulated deficits can also be determined with reference to both the deficit servicing requirements and deficit servicing sources. This analysis will entail identification of cause and effect relationships that determine the factors influencing each of these two areas. As shown by other researchers, the explanatory variables leading to deficits include domestic budgetary receipts; tax structure; budgetary endowments; budgetary discretionary expenses; trade deficit; growth in real GDP; private consumption; domestic capital formation; and foreign direct investment flows. Deficit servicing requirements analysis takes into account accumulated deficit; expected additions to deficit; deficit held by Government Accounts, by Federal Reserve System, by public–domestic...
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...bridge, the Verrazano Bridge that links New In this chapter, we will learn how discre- York City’s Staten Island to the borough of tionary fiscal policy fits into the model of Brooklyn, carries more than 300,000 cars short-run fluctuations we developed in each day. Chapter 10. We’ll see how deliberate In Japan, stories like this are common. During the 1990s the Japanese government What you will learn in this chapter: changes in government spending and tax policy affect real GDP. We’ll also see how ® What fiscal policy is and why it is an important tool in managing economic fluctuations ® Which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy ® Why fiscal policy has a multiplier effect and how this effect is influenced by automatic stabilizers ® How to measure the government budget balance and how it is affected by economic fluctuations ® Why a large public debt may be a cause for concern ® Why implicit liabilities of the government are also a cause for concern spent around $1.4 trillion on...
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...Causes of Euro debt crisis 1. Profligacy of the European Government & Unsustainable Fiscal Policy Countries including Greece, Portugal, Ireland, Spain and Italy in Europe are now paying a heavy price on their profligate way of spending, as reflected by the Euro debt crisis starting from late 2009. Fiscal policy is the use of government expenses and taxation income so as to influence the economy, while the average fiscal deficits had grown from 0.6% in 2007 to 7% at the beginning of the debt crisis across the Europe (Économistes Atterrés, 2010). Therefore, more and more debts were being issued by the above governments so as to support their national expenses, leading to an excessive rise in government debt levels. For instance, the average government debts per GDP had raised from 66% to 84% in the same period (Krugman, 2012).Basically, government debt is the money owed by the central government to the debt holders. As a result, with a high level of the debt-to-GDP ratio may imply that the country is less likely to repay the debt holders but higher chance to default on its debt obligations. Greece, contributing about 3.3% of the annual GDP towards the European Union (Central Intelligence Agency, 2012), with a 165.3 % of debt-to GDP ratio in 2011, was responsible for the outbreak of the Euro debt crisis. Historically, Greece Government’s Debt to GDP ratio was already at a relatively high level across Europe (McAuley, 2011)(Graph 1). Following by the adoption of the...
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...Public debt External debt of Indonesia has been declined to around 28% in 2013. This speaks to a healthy condition contrasted with developed nations that are at present stuck in an unfortunate public debt. Thus, Indonesia's showed attractive decline in export percentage; from 179.7 % in 2004 to 97.4% in 2011. These percentages calculate the administration's capacity to make future instalments on its debts, therefore emphatically influencing Indonesia's cost of borrowings, government security yields and global credit assessments when this debt is as low as on account of Indonesia. This improvement is especially because of the judicious monetary arrangement methodology of the Indonesian government and consistence with financial principles that set cut-off points on the upper level of debt. Biggest Contributors to Government Debt in Indonesia Biggest creditors of Indonesia is united states and japan and other 25% is borrowed from the international organisation like world bank, asian development organisation and etc. The forecasts done about indonesia’s GDP again moderate sliding in governments debt due to appreciation in rupiah, reduction in interest rates, and robust economic growth. Debt of Indonesian to GDP Ratio from 2008 to 2015: There is only little impact in Indonesia’s debt ratio in macroeconomics. depreciation of currency in Indonesia is 30% and it would increase the public debt ratio about 25 % of GDP. The hike in real interests rates may have a little change...
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...economic units. The policy influences the behavior of economic forces through public finance. Major objectives of the fiscal policy of Bangladesh are to ensure macroeconomic stability of the country, promote economic growth, and develop a mechanism for equitable distribution of income. The main tools to achieve these objectives are variation in public revenue, variation in public expenditure, and management of public debt. These are reflected in the budgetary operations of the government, prepared and implemented on year-on-year basis. While the Government’s fiscal strategy emphasizes the need for maintaining overall Macroeconomic stability and fiscal sustainability, the government is investing substantially in building physical infrastructure especially in the communication and Power sector as well as in developing human resources for achieving growth and augmenting the development process – necessary conditions for reducing poverty. The present government has planned to raise the level of investment to 30-32 percent of GDP in order to achieve a GDP Growth rate of 8 percent by 2013 as envisaged in “Vision 2021”. This investment may come from the government, the private sector as well as FDI. As a student of B.B.A program of finance & banking the task in this paper is to find out how the fiscal policy perform in the economic development of our country. Evaluate the performance of fiscal policy is a topic of significant research interest to academics and an issue of...
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...developing country, it is important to get good sovereign credit rating as it helps to access funding in international bond markets. On Tuesday, 30th July 2013, Fitch has announced downgrade Malaysia’s sovereign credit rating outlook to Negative from Stable. This is the most serious action taken by a global rating agency to date. Fitch negative credit outlook on Malaysia create a negative impact on Malaysia in term of higher costs of borrowings and also result into a higher inflationary effect (The Malay Mail Online, 2013). However, Fitch still maintained Malaysia’s existing high investment-grade ratings “A-“ on long-term foreign debt meanwhile rating for long-term local debt is “A” (Maierbrugger, 2013). As highlighted by Fitch, the major reason of the downgrading is due to the worsening in Malaysia’s public finance especially the rising debt levels, and anticipated weakening of prospects for fiscal consolidation and budgetary reforms. From my personal point of view, the downgrading by Fitch is justifiable. My viewpoints are substantiated based on my findings as below...
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...This article was downloaded by: [University of Southampton Highfield] On: 15 March 2013, At: 09:07 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Post-Communist Economies Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/cpce20 Debt sustainability in the EU New Member States: empirical evidence from a panel of eight Central and East European countries Matthieu Llorca & Srdjan Redzepagic a b a b LEG/FARGO, University of Dijon, France CEMAFI, University of Nice-Sophia Antipolis, Nice, France Version of record first published: 16 May 2008. To cite this article: Matthieu Llorca & Srdjan Redzepagic (2008): Debt sustainability in the EU New Member States: empirical evidence from a panel of eight Central and East European countries, Post-Communist Economies, 20:2, 159-172 To link to this article: http://dx.doi.org/10.1080/14631370802018882 PLEASE SCROLL DOWN FOR ARTICLE Full terms and conditions of use: http://www.tandfonline.com/page/terms-and-conditions This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. The publisher does not give any warranty express or implied or make any representation...
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... After studying this chapter, you should be able to understand: Public Budget Budget Deficits and Surplus Expansionary and Contractionary Fiscal Policy Discretionary and Automatic Fiscal Policy National Debts and Its Issues and Misconceptions Problems with Fiscal Policy : Macroeconomics According to Keynes, government has to intervene to stabilize the economy. Stabilization can be achieved in part by manipulating the Public Budget to increase output and employment or to reduce inflation. The Budget outlines the government’s taxation and expenditure plans for the coming fiscal year. The Ministry of Finance are responsible for the preparation of the budget. Sources of Revenues: Direct taxes on individuals and companies Indirect taxes on goods and services (gasoline, alcohol, tobacco, etc) Non-tax revenue (stamp duty, licenses, permits, etc) Malaysia: Sources of Revenue (in RM) 1990 2013 2014 Direct Taxes 35.2% 56.5% 59.1% Indirect Taxes 36.7% 16.6% 17.2% Non-Tax Revenue 28.0% 26.9% 23.7% Total Revenue 29,521m 207,913m 224,094m Source: Ministry of Finance Categories of Expenses: Operating Expenditure (emolument, pensions, debt servicing, grant to states, subsidies, supplies, scholarships, etc) Development Expenditure (security, social services, economic services, expenditure on goods and services). 1990 2012 2014 70.3% 81...
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...dollars to produce a surplus in the balance of payments. (Optional note) Sometimes the term ”balance of payments” is used to describe the official settlements balance with the opposite sign. This balance indicates the payments gap covered by the official reserve transactions. For example, the U.S. official settlements balance in 2003 is 250 billion dollars. In this case, some newspapers may say that ”the U.S. balance of payments in 2003 is -250 billion dollars.” When it is a large negative number, it is often a subject of concern because it indicates an excessive role of the central bank in financing the current account deficit. 2. (2 points) Suppose that the U.S. net foreign debt is 25 percent of U.S. GDP and that foreign assets and liabilities alike pay an interest rate of 5 percent per year. What would be the drain on U.S. GDP (as a percentage) from paying interest on the...
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...deficit, as well as the second highest debt to GDP ratio in the EU. The paper uses insights from the literature to offer an analytical treatment of the crisis in Greece. The crisis itself is very likely to be a result of: The gradual worsening of Greek macroeconomic Fundamentals over 2000-2009 to levels discrepant with other EU members. A shift in market expectations, from a scenario of credible commitment to future EU participation to a scenario of non-credible EU commitment without fiscal guarantees, respectively occurring in November 2009 and February/March 2010. The pricing by markets of a (previously nonexistent) default risk that follows the withdrawal of an implicit guarantee on Greek debt by other EMU countries (mainly Germany). Interestingly, our account of the 3 factors sparking and escalating the crisis also helps explain why prices on Greek government bonds have not recovered but continued to plummet following the announcement of the EU/IMF rescue plan. Our analysis suggests that the involvement of an external institution like the IMF in EU affairs will in all likelihood widen the market uncertainty over possible co-ordination failures between the EU and IMF policy makers and fail to stabilize market expectations on a credible resolution of the Greek crisis. LITERATURE REVIEW Some work has been done by Vanessa Rossi and Rodrigo Delegado Aguilera in their paper, “No Painless solution to Greece’s Debt Crisis”,...
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...Matt Gibson Professor Moore The Effects Of Deleveraging An attempt to decrease the company’s leverage is widely known as deleveraging. If a company pays off any existing debt on its balance sheet, so it is considered as the best way for it to deleverage its sheet and become more liquid. The company may be facing a significant risk of defaults if it fails to pay off its existing debts. Deleveraging can be done both on micro-economic and macro-economic levels. At micro-economic level, decreasing the leverage ratio is known as deleveraging, of a single firm or single economic entity. Moreover, deleveraging on macro-economic level is when there is a reduction in debt levels in private and public sectors. Hence, this leads to a decline in the debt to the GDP ratio in the national account. There are several macro-economic consequences of deleveraging in an economy followed by severe recessions and financial crisis. According to some studies, deleveraging is considered as the main economic trend for the coming years. However, in contradiction to this, a lot of researchers show that this economic term can prove to be unhelpful. The most important step to reduce the assets to equity ratio is to reduce the amount of debt held by a company, government or household. This is the first way of cutting leverage. It is important to understand that assets must be reduced as well if the books need to be balanced; hence, not necessarily do assets support some kind of real economic activity...
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