Debt overhang, liquidity constraints and adjustment incentives

Investment in most heavily indebted countries has been weak since 1982. Several papers (Krugman, 1988; Corden, 1988; Sachs, 1989) have subsequently established the debt overhang proposition: the existence of a heavy debt burden reduces the incentive to invest.1 This proposition has given an important rationale for the 1989 shift in international debt management, emphasizing debt relief rather than new money for problem debtors. This paper will raise doubts against the debt overhang proposition: Its analytical implications are found to be ambiguous, its empirical content is found to be weak. We conclude, that investment in the average debtor country is likely to benefit more from new lending than from debt reduction.

Complex dynamics in fashion life cycles

Fashions and their revivals occur in a rather erratic manner. The paper shows that such fluctuations can be derived from the utility maximizing behaviour of rational individuals with stable preferences. It is assumed that the demand for the fashion good is determined, amongst other variables, by the social environment the individual is living in. There are positive and negative consumption externalities. If there are lags in the reaction of the individual to what other people do, then the demand for fashion goods may fluctuate over time. For certain parameter constellations, there may even be deterministic chaos.

Monetary overhang and the dynamics of prices, exchange rates, and income in the transition to a market economy

The long road from capitalism to capitalism the Eastern European economies have made has been paved with many economic problems, but the transition from a command economy into a market economy is likely to become a bumpy ride as well. Apart from the major real economic reforms that have to take place, combined with virtual turnaround of the political structure, several countries aiming to reform face a monetary problem as well. Due to persistent state budget deficits, financed by the printing press, a so called monetary overhang threatens the reform process. Monetary overhang is here defined as the excess of money supply over demand at the current price level and at world market interest rates. The consequences of the monetary overhang under a planning system are obvious: the fixity of prices prevents the real money supply from falling to its equilibrium level, and the situation of repressed inflation translates into long queues in front of shops, forced savings, and, if not checked, into a flourishing black market and corruption. The official exchange rate is overvalued, but import demand is checked by rationing of foreign exchange.

Evaluating fiscal equalization in Indonesia

This paper presents a methodology to evaluate fiscal decentralization focusing on the potential mis-targeting of intergovernmental fiscal equalization transfers. The approach builds on an explicit comparison and the summary measurement of different (horizontal) allocation distributions across states or localities. Whereas formula-based fiscal transfers have the merit of being transparent and promoting revenue predictability in fiscal decentralization, in practice, two challenges emerge: (1) What are the appropriate formula designs given the sub-national data constraints evident in most decentralizing developing countries? and (2) How costly in terms of mis-targeting to the presumed expenditure needs and fiscal capacity are deviations from these types of benchmark formulas (for example, due to historical factors or the need to meet establishment costs such as civil service wages)? The authors illustrate this approach by assessing Indonesia's evolving intergovernmental fiscal system instituted in the 2001 Big Bang decentralization. The discussion comes against Indonesia's recent policy decision to fully fund sub-national civil servant wages as part of the base general allocation grant (DAU) transfers, raising questions about both incentive effects for local governments and potential mis-targeting. The authors identify potential efficiency losses from the DAU's horizontal misallocation from half a dozen alternative scenarios found in the policy dialogue, ranging from 9 to 30 percent-on the order of US$ 3.9 billion-of the overall annual size of this large intergovernmental transfer. The scale of these tradeoffs highlights the importance of intergovernmental transfers in more general debates in public finance for decentralized countries.Economic Theory&Research,Public Sector Management and Reform,Fiscal Adjustment,Regional Governance,Urban Governance and Management

Debt overhang, liquidity constraints and adjustment incentives

Investment in most heavily indebted countries has been weak since 1982. Several papers (Krugman, 1988; Corden, 1988; Sachs, 1989) have subsequently established the debt overhang proposition: the existence of a heavy debt burden reduces the incentive to invest.1 This proposition has given an important rationale for the 1989 shift in international debt management, emphasizing debt relief rather than new money for problem debtors. This paper will raise doubts against the debt overhang proposition: Its analytical implications are found to be ambiguous, its empirical content is found to be weak. We conclude, that investment in the average debtor country is likely to benefit more from new lending than from debt reduction

Complex dynamics in fashion life cycles

Fashions and their revivals occur in a rather erratic manner. The paper shows that such fluctuations can be derived from the utility maximizing behaviour of rational individuals with stable preferences. It is assumed that the demand for the fashion good is determined, amongst other variables, by the social environment the individual is living in. There are positive and negative consumption externalities. If there are lags in the reaction of the individual to what other people do, then the demand for fashion goods may fluctuate over time. For certain parameter constellations, there may even be deterministic chaos

Monetary overhang and the dynamics of prices, exchange rates, and income in the transition to a market economy

The long road from capitalism to capitalism the Eastern European economies have made has been paved with many economic problems, but the transition from a command economy into a market economy is likely to become a bumpy ride as well. Apart from the major real economic reforms that have to take place, combined with virtual turnaround of the political structure, several countries aiming to reform face a monetary problem as well. Due to persistent state budget deficits, financed by the printing press, a so called monetary overhang threatens the reform process. Monetary overhang is here defined as the excess of money supply over demand at the current price level and at world market interest rates. The consequences of the monetary overhang under a planning system are obvious: the fixity of prices prevents the real money supply from falling to its equilibrium level, and the situation of repressed inflation translates into long queues in front of shops, forced savings, and, if not checked, into a flourishing black market and corruption. The official exchange rate is overvalued, but import demand is checked by rationing of foreign exchange