Essays in empirical public finance

Thesis

Both government net worth – the balance of government assets and liabilities – and government investment have fallen substantially, relative to national income, in many OECD countries in recent decades (Atkinson, 2015; IMF, 2014). This thesis investigates the macroeconomic implications of these developments, for fiscal sustainability on the one hand and for economic growth on the other.

Chapter 1 explores the relevance of the composition of government budget deficits for government bond markets. We use data for 31 OECD countries from 1990 to 2014 from the European Commission's AMECO database to show that, from the perspective of bond markets, not all budget deficits are created equal: markets charge significantly higher interest rates for deficits due to government current spending than for those due to government investment.

Chapter 2 investigates whether bond markets accord importance to the asset side of the government balance sheet and hence to government net worth, above and beyond government liabilities. We use data on both sides of the government balance sheet drawn from Piketty and Zucman (2014) – for a panel of 10 OECD countries in recent decades and for the United States over the long term – to show that, for bond markets, not all government debt is created equal: for explaining the cost of government borrowing empirically, government assets are significant, and it is government net worth rather than government liabilities that matters.

Chapter 3 is concerned with how government asset accumulation affects economic growth. We first assess the predictive relevance of government investment and government consumption for future growth, and then estimate a standard growth model in the spirit of Solow (1956) using econometric methods suitable for addressing possible endogeneity. We find that there is a significant difference in the growth effects of government investment and government consumption: government investment aids growth, while government consumption significantly impedes growth, both for a set of OECD countries and globally. These findings help to rationalise why bond markets take into account the extent to which a government budget deficit or debt increase is accompanied by government asset accumulation, as we found in Chapters 1 and 2. They also imply that the composition of government budget deficits and government balance sheets will impact future growth prospects and matter for the implementation of austerity policies and the design of fiscal rules in monetary unions.

Authors: Peppel-Srebrny, J

• DOI: 10.5287/ora-erazoepj4
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: Panel data; Long-term interest rates; Fiscal policy; Public finance; Government balance sheets; Government budget deficit
• Subjects: Economics