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Long-term Debt (long-term + debt)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting80%

Selected Abstracts

Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level

ECONOMETRICA, Issue 1 2001
John H. Cochrane
The fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. I analyze long-term debt and optimal policy in the fiscal theory. I find that the maturity structure of the debt matters. For example, it determines whether news of future deficits implies current inflation or future inflation. When long-term debt is present, the government can trade current inflation for future inflation by debt operations; this tradeoff is not present if the government rolls over short-term debt. The maturity structure of outstanding debt acts as a "budget constraint" determining which periods' price levels the government can affect by debt variation alone. In addition, debt policy,the expected pattern of future state-contingent debt sales, repurchases and redemptions,matters crucially for the effects of a debt operation. I solve for optimal debt policies to minimize the variance of inflation. I find cases in which long-term debt helps to stabilize inflation. I also find that the optimal policy produces time series that are similar to U.S. surplus and debt time series. To understand the data, I must assume that debt policy offsets the inflationary impact of cyclical surplus shocks, rather than causing price level disturbances by policy-induced shocks. Shifting the objective from price level variance to inflation variance, the optimal policy produces much less volatile inflation at the cost of a unit root in the price level; this is consistent with the stabilization of U.S. inflation after the gold standard was abandoned. [source]

Nominal debt and inflation stabilization

INTERNATIONAL JOURNAL OF ECONOMIC THEORY, Issue 4 2009
Shigeto Kitano
E63; F41 The "fiscal theory of currency crises" (Daniel 2001; Corsetti and Ma,kowiak 2005, 2006) claims that with long-term nominal debt, a government can delay the timing of an inevitable currency crisis that results from a fiscal shock. The present paper shows that, in contrast, long-term nominal debt might have destabilizing effects when a government introduces an inflation stabilization policy. It is shown that a stabilization policy that is successful in the absence of long-term nominal debt can cause a crisis when long-term nominal debt exists. The model implies that a government with a large stock of long-term nominal debt must overcome a high fiscal hurdle for a successful stabilization policy. This difficulty is avoidable if long-term debt is indexed to inflation. [source]

The Implications of Trade Credit for Bank Monitoring: Suggestive Evidence from Japan

JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY, Issue 2 2008
Yoshiro Miwa
Firms in modern developed economies borrow from both banks and trade partners. Using Japanese manufacturing data from the 1960s, we estimate the price of trade credit, and explore some of the ways firms choose between the credit and bank loans. We find that firms of all sizes borrow heavily from their trade partners, and at implicit rates that track the explicit rates banks would charge. They borrow from banks when they anticipate needing money for relatively long periods; they turn to trade partners when they face short-term unexpected exigencies. This apparent contrast in the term structures follows, we suggest, from the fundamentally different way bankers and trade partners cut default risk. Because bankers seldom know their borrowers' industries first hand, they rely on formal legal protection (like security interests). Because trade partners know the industry well, they reduce risk by monitoring their borrowers closely instead. Because the costs to creating legal mechanisms are heavily front-loaded, bankers focus on long-term debt; because the costs of monitoring debtors are ongoing, trade creditors do not. Apparently, banks monitor less than we have thought. [source]

DOLLARIZATION OF DEBT CONTRACTS: EVIDENCE FROM CHILEAN FIRMS

THE DEVELOPING ECONOMIES, Issue 4 2009
Miguel FUENTES
F31; F49 This paper uses a new data set to estimate the causes and consequences of foreign currency debt in firms' balance sheets. The evidence from this sample of Chilean firms indicates that dollar-denominated debt increases with firms' size and degree of exposure to foreign competition. We find evidence that dollar-denominated debt combines with exchange rate movements to produce a negative balance-sheet effect that reduces firms' investment in periods of strong exchange rate depreciation. This negative balance-sheet effect is associated with long-term debt and appears to be nonlinear in the amount of real exchange rate depreciation. [source]