Speed of adjustment of capital structure: empirical study

We analyze the impact of firm-specific characteristics as well as economic factors on the speed of adjustment to the target debt ratio. Using different methods, we document speeds of adjustment ranging from 14.4% to 37%. The results indicate that the speed of adjustment is affected by business-cycle variables: The interaction term related to term spread reveals, as expected, faster adjustment in booms than in recessions and a negative relationship between short term spread and adjustment speed. We also show that the speed of adjustment becomes stationary when the increasing fractions of zero-debt firms are considered.

The marginal cost of funds from public sector borrowing

An expression for the welfare cost of a marginal increase in the public debt is derived using a simple AK endogenous growth model. This measure of the marginal cost of public funds (MCF) can be interpreted as the marginal benefit-cost ratio that a debtfinanced public project needs in order to generate a net social gain. The model predicts an increase in the public debt ratio will have little effect on the optimal public expenditure ratio and that most of the adjustment will occur on the tax side of the budget.

What if firms adjust their debt-equity ratios toward a target range?

We estimate optimal target-ranges of capital structure controlling for a series of firmspecific characteristics and accounting for the serial correlation that arises from the dynamic component of the leverage choice. Then, we empirically examine if firms adjust their leverages toward the estimated optimal ranges. Our analysis suggests that the observed behavior of firms is consistent with the notion of range-adjustment.

Public debt and the limits of fiscal policy to increase economic growth

Research that seeks to estimate the effects of fiscal policies on economic growth has ignored the role of public debt in this relationship. This study proposes a theoretical model of endogenous growth, which demonstrates that the level of the public debt-to-gross domestic product (GDP) ratio should negatively impact the effect of fiscal policy on growth. This occurs because government indebtedness extracts part of the savings of the young to pay interest on the debts of the older generation, who are no longer saving. Therefore, the payment of debt interest assumes an allocation exchange role between generations that is similar to a pay-as-you-go pension system, which results in changes in the savings rate of the economy. The major conclusions of the theoretical model were tested using an econometric model to provide evidence for the validity of this conclusion. Our empirical analysis controls for timeinvariant, country-specific heterogeneity in the growth rates. We also address endogeneity issues and allow for heterogeneity across countries in the model parameters and for cross-sectional dependence.

Debt management in Brazil: evaluation of the Real Plan and challenges ahead

The Brazilian domestic debt has posed two challenges to policy-makers: it has grown very fast and its maturity is extremely short. This has prompted fears that a default or a compulsory lengthening scheme would be imposed. Here, we analyse the domestic public debt management experience in Brazil, searching for policy prescriptions for the next few years. After briefiy reviewing the recent domestic public debt history, we decompose the large rise in federal bonded debt during 1995-2000, searching for its macroeconomic causes. The main culprits are the extremely high interest payments-which, unti11998, were caused by the weak fiscal stance and the quasi-fixed exchange-rate regime; and since 1999, by the impact ofthe currency depreciation On the dollar-indexed and the externai debt-, and the accumulation of assets of doubtful value, much of which may have to be written off in the future. Simulation exercises of the net debt path for the near future underscore the importance of a tighter fiscal stance to prevent the debt-GDP ratio from growing further. Given the need to quickly lengthen the debt maturity, our main policy advice is to foster, and rely more on, infiation-linked bonds.

Debt and default in a growth model

This paper presents a small open economy model with capital accumulation and without commitment to repay debt. The optimal debt contract specifies debt relief following bad shocks and debt increase following good shocks and brings first order benefits if the country's borrowing constraint is binding. Countries with less capital (with higher marginal productivity of capital) have a higher debt-GDP ratio, are more likely to default on uncontingent bonds, require higher debt relief after bad shocks and pay a higher spread over treasury. Debt relief prescribed by the optimal contract following the interest rate hikes of 1980-81 is more than half of the debt forgiveness obtained by the main Latin American countries through the Brady agreements.