“The Swiss Debt Brake—Ten Years On,” SJES, 2013

Swiss Journal of Economics and Statistics 149(2), June 2013, with Christoph Schaltegger. PDF.

In response to the rapid growth of public indebtedness during the 1990s, Switzerland enacted a constitutional budget restriction in 2003: the Swiss Debt Brake. Aimed at balancing the federal budget over the cycle the fiscal rule appears to have left its mark. At the debt brake’s tenth anniversary, Switzerland’s fiscal position has improved considerably. Several other countries have also implemented fiscal rules, but with mixed success. What lessons are there to be learned from these experiences?

IMF Policy Vis-a-vis Greece

Christoph Eisenring reports in the NZZ about a critical internal assessment of the IMF’s recent policy vis-a-vis Greece. The relaxation of the “medium term solvency” requirement for IMF lending in a situation of acute contagion risk should be reconsidered; contagion should be addressed with different instruments; debt should be restructured earlier than happened in the Greek case; and bail-ins should be favoured.

Government Non-Financial Assets

Elva Bova, Robert Dippelsman, Kara Rideout and Andrea Schaechter review the evidence on governments’ non-financial assets in an IMF working paper. An excerpt from the abstract:

… state-owned nonfinancial assets across 32 economies, with particular focus on the advanced G-20 economies. We find that reported nonfinancial assets comprise mostly structures (such as roads and buildings) and,when valued, land. These assets have increased over time, mostly due to higher property and commodity prices, and are, in large part, owned by subnational governments. Many countries have launched reforms with a view to streamlining public administrations, but receipts and savings have been rather small so far. Governments tend to consider relatively small sets of assets to be disposable …

 

Foreign-Law Sovereign Debt

The Economist discusses the consequences of issuing sovereign debt under foreign law. Investors in Greek government debt did better if they owned paper governed by English law—these series escaped the retroactive addition of collective-action clauses that Greece added to its domestic law bonds in 2012 before renegotiating with its creditors. For Argentine debt the situation may be reversed, due to the New York court decision in the case of Elliott Management against the Republic of Argentina. Indeed, default risk might be lower for Argentine domestic-law bonds.

Household Balance Sheets in the Euro Area

The ECB has published the results of the Eurosystem’s first Household Finance and Consumption Survey. Some results:

  • About 60% of households in the euro area own their main residence—with or without a mortgage. About 11% own a business, and 76% own vehicles.
  • 97% of households own sight deposits or savings accounts. Some (33%) hold voluntary private pensions or life insurance and few (15%) own other financial assets. Only a quarter of households in the top income quintile holds mutual funds; also, a quarter of households in the top income quintile holds publicly traded shares.
  • 23% of households have mortgage debt and 29% have non-mortgage debt. Conditional on having debt, the median value is Euro 68400 and Euro 5000, respectively.

Here are the mean and median net wealth statistics by country and socioeconomic characteristic.

Haircut Estimates for 180 Sovereign Debt Restructurings

Juan Cruces and Christoph Trebesch have posted data on 180 sovereign debt restructurings between 1978 and 2010. They analyse this data in a paper forthcoming in the American Economic Journal: Macroeconomics.

Cruces and Trebesch consider distressed restructurings of medium and long-term public or publicly guaranteed debt with foreign private creditors (including commercial banks and bondholders but excluding official creditors organised in the Paris Club) that were ever finalized. Their preferred haircut measure varies between -10% (Brazil, February 1983) and 97% (Republic of Yemen, February 2001).

IMF Discussion Note on Banking Union in the Euro Area

Rishi Goyal, Petya Koeva Brooks, Mahmood Pradhan, Thierry Tressel, Giovanni Dell’Ariccia, Ross Leckow, Ceyla Pazarbasioglu et al discuss the case for a banking union in the Euro area in an IMF Staff Discussion Note. The authors argue in favour of both a single supervisory-regulatory framework and a common resolution mechanism as well as safety net.

Surnames and Social Mobility

The Economist reports about research that exploits variation in the frequency of surnames over time to infer the degree of social mobility over centuries.

As late as 2011 aristocratic surnames appear among the ranks of lawyers, considered for this purpose a high-status position, at a frequency almost six times that of their occurrence in the population as a whole. Mr Clark reckons that even in famously mobile Sweden, some 70-80% of a family’s social status is transmitted from generation to generation across a span of centuries. Other economists use similar techniques to reveal comparable immobility in societies from 19th-century Spain to post-Qing-dynasty China.

The article quotes several papers on the topic.

Chinese Government Report on Options to Reduce Wealth Inequality

Markus Ackeret in the NZZ discusses a long-awaited Chinese government report on policy options to reduce wealth disparities. They include: Less manipulation of interest rates; more manipulation of wages; higher real estate taxes; higher dividend payments of government owned enterprises; changes in the legal status of workers moving from the countryside to the cities (hukou).

Options for British Tax Evaders to Come Clean

hus in the NZZ writes about options for British tax evaders to come clean about hidden financial assets abroad.

UK residents with Swiss assets who do not want their identity to be disclosed to the British authorities can pay taxes on their asset holdings to the Swiss authorities instead; the Swiss will (partly) hand them over to London. The relevant treaty between the UK and Switzerland was put into effect in 2013.

UK residents often prefer an alternative option, though, namely to “legalise” their world wide asset holdings using a treaty between Liechtenstein and the UK. According to that treaty, assets fully declared before the end of 2016 trigger a penalty of about 10% to 20% of the relevant asset holdings, as compensation for evaded taxes in the past. British tax payers can use this option as long as the fraction of their offshore assets that they invested in Liechtenstein is sufficiently high.

Iceland’s Deposit Insurance Found Non-Discriminatory

The Economist reports about an EFTA court decision concerning Iceland’s decision to discriminate among depositors after the collapse of Icesave, an online bank. The bank had collected deposits in the UK and the Netherlands, using a European “passport” which relied on the notion that the Icelandic deposit insurance scheme would back those deposits. After the collapse, the insurance turned out to be insufficient; while Icelandic savers received their money back, British and Dutch depositors did not. But eventually, their respective governments bailed them out—and now went to court.

… the court found that Iceland was obliged only to make sure that it had a deposit-insurance scheme. The state was not required to pay out if the scheme had no money because of a banking crisis. Oddly, the court also found that Iceland had not breached an obligation not to discriminate between domestic and foreign depositors, even though it made only the domestic ones whole.

“Riskante Renten (Risky Entitlements),” FuW, 2013

Finanz und Wirtschaft, January 5, 2013. PDF. Ökonomenstimme, January 8, 2013. HTML.

  • Future pension benefits will reflect future national income, and how generations share it.
  • Future income depends on current savings and thus, the structure of the pension system.
  • How the income is shared depends on political factors, not promises.

“Economic and Politico-Economic Equivalence,” CEPR, 2012

CEPR Discussion Paper 9203, November 2012, with Martín Gonzalez-Eiras. PDF.

We extend “economic equivalence” results, like the Ricardian equivalence proposition, to the political sphere where policy is chosen sequentially. We derive conditions under which a policy regime (summarizing admissible policy choices in every period) and a state are “politico-economically equivalent” to another such pair, in the sense that both pairs give rise to the same equilibrium allocation. The equivalence conditions help to identify factors that render institutional change non-neutral. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.

Quality of Life in 2030

The Economist reports about the Economist Intelligence Unit’s quality-of-life predictions. In a first step, current life satisfaction is “explained” based on a cross country, multivariate regression using eleven indicators like national income, crime, trust or health. In the second step, the predicted values of those indicators in the year 2030 are used to predict future life satisfaction.

Switzerland clearly wins, ahead of Australia, Norway, Sweden, Denmark, Singapore, New Zealand, Netherlands, Canada, Hong Kong, Finland, Ireland, Austria, Taiwan, Belgium, Germany, United States, United Arab Emirates, South Korea and Israel. More on the methodology.