Debt and Risk Preference: A Household Level Analysis

We explore the relationship between risk preference and the level of unsecured debt at the household level within the context of a two period theoretical framework, which predicts that debt is a function of risk aversion. We test the predictions of our theoretical framework for a sample of households drawn from the U.S. Panel Study of Income Dynamics (PSID) and the U.S. Survey of Consumer Finances (SCF). Using a sequence of questions from the 1996 PSID and the 1989 to 2004 SCF, we construct measures of risk preference allowing us to explore the implications of interpersonal differences in risk preference for the accumulation of unsecured debt at the household level. Our empirical findings, which accord with our theoretical priors, suggest that risk preference is an important determinant of the level of unsecured debt acquired at the household level with risk aversion serving to reduce the level of unsecured debt accumulated by households

How cash flow volatility affects debt financing and accounts payable

This paper investigates how volatility of cash flow from operations affects debt financing and accounts payable using a sample of Italian listed firms. Firms with different levels of cash flow were also examined. We find that firms that have more cash flow volatility have lower long-term debt to total debt, whatever the average level of their cash flow. We also show that accounts payable is positively associated with cash flow volatility, in particular for firms with a higher level of cash flow. Lastly, research findings reveal that firm leverage as measured by the total debt to assets ratio is negatively associated with cash flow volatility when firms have a lower level of cash flow, while the same relationship was not found for firms with a higher cash flow level

The Distribution and Dispersion of Debt Burden Ratios Among Households in Poland and its Implications for Financial Stability

Debt burden ratio as measured on the aggregate level does not give an adequate assessment of the ability of the household sector to repay its debt. The low level of financial deepening in Poland is primarily reflected in a low percentage of households that have been granted a loan. Therefore, the average debt burden for households, which have any debt outstandings could be much higher than the one measured on the aggregate level. If the debt is concentrated among groups of households with lower incomes, it can threat the financial stability in case of FX or interest rate shocks. Using the data from Polish Households Budget Survey we first define three different measures of debt burden and calculate its dispersion in time and distribution among income groups. We find that (1) the total debt service burden and loan service burden ratios are on lower levels than in other European countries and recently have not risen substantially, (2) the mortgage debt service burden ratio has been rapidly increasing in the last four years especially in lower income groups of households reaching in 2004 the 3/4 of the level noted in EU-15. In comparison with EU it seems that the level of indebtedness of house- holds in Poland is on a secure level. However, we notice that the secure level of debt burden ratio is on a lower level in emerging market countries than in wealthier countries because of the higher share of basic living costs in total consumption expenditure. Therefore, the increasing levels of mortgage debt service ratios in lower-income groups could pose a potential threat to the financial stability in case of FX or interest rate shock.Financial stability; debt burden; sebt service burden; haousehold indebtedness

Mortgages and Financial Expectations: A Household Level Analysis

We contribute to the literature on household mortgage debt by exploring one particular influence on mortgage debt at the household level, namely the financial expectations of the individuals within the household. Our theoretical model predicts a positive association between the quantity of mortgage debt and optimistic financial expectations. Our empirical findings based on household level data provide convincing support for our theoretical priors in that optimistic financial expectations are positively associated with the level of outstanding mortgage debt.Financial Expectations; Housing Tenure; Inter-temporal Consumption; Mortgage Debt

Internal capital markets and capital structure: Bank versus internal debt.

Recent empirical evidence has shown that internal capital markets within multinational corporations are used to reduce overall financing costs by optimizing the mix of internal and external debt of affiliates in different countries. We show that this cost saving use of internal capital markets is not limited to multinationals, but that domestic business groups actively optimize the internal/external debt mix across their subsidiaries as well. We use both subsidiary and group level financial statement data to model the bank and internal debt concentration of Belgian private business group affiliates and show that a pecking order of internal debt over bank debt at subsidiary level leads to a substantially lower bank debt concentration for group affiliates as compared to stand-alone companies. However, as the group's overall debt level mounts, groups increasingly locate bank borrowing in subsidiaries with low costs of external financing (i.e. large subsidiaries with important collateralable assets) to limit moral hazard and dissipative costs.Internal capital markets; Capital structure; Debt source concentration; Ownership structure; Bank debt;

Debt stabilization in a Non-Ricardian economy

In models with a representative infinitely lived household, tax smoothing implies that the steady state of government debt should follow a random walk. This is unlikely to be the case in overlapping generations (OLG) economies, where the equilibrium interest rate may differ from the policy maker's rate of time preference. It may therefore be optimal to reduce debt today to reduce distortionary taxation in the future. In addition, the level of the capital stock in these economies is likely to be suboptimally low, and reducing government debt will crowd in additional capital. Using a version of the Blanchard-Yaari model of perpetual youth, with both public and private capital, we show that it is optimal in steady state for the government to hold assets. However, we also show how and why this level of government assets can fall short of both the level of debt that achieves the optimal capital stock and the level that eliminates income taxes. Finally, we compute the optimal adjustment path to this steady state

Price-Level Uncertainty, Price-Level Targeting, and Nominal Debt Contracts

Many central banks around the world have embraced inflation targeting as a monetary policy framework. Interest is growing, however, in price-level targeting as an alternative. The choice of frameworks has important consequences for financial contracts, most of which are not fully indexed to the price level. Changes in the price level therefore lead to changes in the real value of contracts. Price-level targeting would reduce the size of these changes in real wealth and decrease uncertainty about the future price level. This article assesses the merits of price-level targeting vis-à-vis inflation targeting from a debt-revaluation perspective, with a focus on channels affecting risk premiums, the maturities of nominal debt contracts, and redistribution of wealth. A general conclusion flowing from the analysis is that accounting for the revaluation of nominal debts and assets strengthens the relative merits of price-level targeting compared with inflation-targeting.

Debt stabilizing fiscal rules

Unstable government debt dynamics can typically be corrected by various fiscal instruments, like appropriate adjustments in government spending, public transfers, or taxes. This paper investigates properties of state-contingent debt targeting rules which link stabilizing budgetary adjustments around a target level of long-run debt to the state of the economy. The paper establishes that the size of steady-state debt is a key determinant of whether it is possible to find a rule of this type which can be implemented under all available fiscal instruments. Specifically, considering linear feedback rules, the paper demonstrates that there may well exist a critical level of debt beyond which this is no longer possible. From an applied perspective, this finding is of particular relevance in the context of a monetary union with decentralized fiscal policies. Depending on the level of long-run debt, there might be a conflict between a common fiscal framework which tracks deficit developments as a function of the state of the economy and the unrestricted choice of fiscal policy instruments at the national level. JEL Classification: E63, H62fiscal regimes, overlapping generations

Maximum Sustainable Government Debt in the Overlapping Generations Model.

The theoretical determinants of maximum sustainable government debt are investigated using Diamond's overlapping-generations model. A level of debt is defined to be 'sustainable' f a steady state with non-degenerate values of economic variables exists. We show that a maximum sustainable level of debt almost always exists. Most interestingly, it normally occurs at a 'catastrophe' ather than a 'degeneracy' , i.e. where variables such as capital and consumption are in the interiors, rather than at the limits, of their economically meaningful ranges. This means that if debt is increased step by step, the economy may suddenly collapse without obvious warning.GOVERNMENT DEBT ; OVERLAPPING GENERATIONS

Australia’s foreign debt: a quick guide

This quick guide looks at the level of Australia’s foreign debt, the interest liability on foreign debt and how these have changed over time. It also looks at foreign debt as a component of net foreign investment, the other component being equity investment. Finally, given that Australia’s gross foreign debt is now bigger than its annual gross domestic product (GDP), the quick guide also considers whether our foreign debt level is too high. What is foreign debt? Foreign debt is the amount borrowed from non-residents by residents of Australia. It includes securities such as bonds, as well as loans, advances, deposits, debentures and overdrafts. Foreign debt is a subset of the financial obligations that make up Australia’s foreign investment position.  It is distinguished from other forms of foreign investment capital inflow such as equity investment (foreign ownership) by the obligation to pay interest and/or repay capital. Foreign debt is not to be confused with national debt, which is the total government debt. National debt comprises government borrowings from overseas residents and government borrowings from Australian residents and thus excludes overseas borrowings by the private sector. A distinction is made between gross and net foreign debt. Gross foreign debt is the total amount of borrowing from non-residents. Net foreign debt is equal to gross foreign debt minus the sum of lending by residents of Australia to non-residents and official reserve assets held by the Reserve Bank