Christian Keuschnigg and Evelyn Ribi
This article offers an overview of how different company decisions are affected by various tax policy instruments when some firms are financially constrained due to agency problems between inside and outside investors. To organize the discussion, the article presents a simple theoretical model of constrained and unconstrained firms with endogenous organizational choice. When the managerial effort of entrepreneurs is not observable, a high success probability of the firm is guaranteed only if insiders keep a large enough financial stake in the firm. Accordingly the company's income that is pledgeable as a repayment to external investors is reduced and limits the amount of external funding that the firm can obtain. This framework of financially constrained firms leads to predictions for the effects of taxes on investment and external financing that are entirely different from the traditional neoclassical model.
José María Fanelli
This chapter discusses the problems of domestic financial development in Latin America. The second section analyses a set of stylized facts concerning the Latin American financial system and its evolution during the ‘second globalization’ period. The third section discusses the dynamics of financial development. It emphasizes three issues: the role of crises and reforms as drivers of change; the links between liquidity generation and financial stability; and the coordination failures associated with low financial deepening. The chapter concludes by analysing the challenges associated with growth-friendly financial development, focusing on systemic factors, institution building, and volatility.
This article discusses the East Asian model of capitalism, contrasting it with the textbook version of capitalism, which in most cases is based on an Anglo–American model, and illustrates that the latter is hardly universal. In fact, the latter can be a minority model. It discusses the East Asian model from four perspectives that must be at the center of any such discussion. They are business groups, corporate ownership and management, interfirm relationships, and laissez-faire versus industrial policy.
Entrepreneurs and their financiers in emerging and developing countries face a diversity of challenges and opportunities that often differ from those faced by their counterparts in developed countries. Some of these challenges—if one fictional, but plausible, account from India is to be believed—may be quite extreme. This article considers what we do and do not know about this phenomenon, and how the phenomenon and our knowledge about it are likely to change. The diversity of institutional environments within weak institutional environments (WIEs) has created a wide variety of entrepreneurial financing systems and outcomes. The institutional environment is more important for younger firms seeking external finance than it is for mature firms. A variety of factors may contribute to the size and success of entrepreneurial finance markets in WIEs, including legal origin, the presence (or absence) of government support, tax laws, the development of the banking sector, unexploited opportunities for new investments, the size of the stock market, and the characteristics of institutional investors.
This article addresses the impact on state and local budgets of the underlying trends and tensions facing state and local governments as the United States pulls out of the Great Recession. Noting that recessions are cyclical and there will be a recovery, it draws attention to the “more fundamental challenge for the US state and local fiscal system—indeed for the sustainability of our system of fiscal federalism.” The article focuses on the demographic, economic, and institutional trends that determine expenditure needs and shape revenue sources but that are largely beyond the control of state and local policymakers. Demographic characteristics include the changing rate of growth of the population and its age and ethnic composition as well as shifts in migration flows and household composition across regions.
James E. Spiotto
The Great Recession and its aftermath resurrected concerns that state and local governments would begin to default on their obligations. Many feared that the long and successful history of state and local borrowing in the capital markets was destined to end. As spending needs swamped resources, finding easier ways out of public debt than repaying it as promised might become politically fashionable. This article explains and evaluates the various mechanisms that might deal with municipal and state defaults and insolvencies in the United States. It first explores the historical underpinnings of restructuring municipal debt, providing examples of successes and failures of such efforts in the United States. The era of the Great Depression of the 1930s and its precursors is examined, as is the existing statutory framework for municipal bankruptcy in the United States. Sovereign debt by states and its resolution is also discussed.
John E. Petersen and Richard Ciccarone
Subnational governments are important players in the financial markets, both as issuers of debt securities that pay for infrastructure and as investors that invest funds in the private markets to meet their cash management and employee retirement system needs. The financial markets changed dramatically in the late 2000s and these changes affected the state and local sector. After a discussion of the aggregate balance sheet of state and local governments, this article gives a brief reprise of the financial-market developments in the early 2000s and the subsequent meltdowns of 2007 and 2008, which affected state and local governments. As was true with the entire economy, the financial system debacle was followed by a widespread downturn in activity and this had a disproportionate impact on state and local government revenues. The financial stresses growing from the Great Recession led to major changes in the municipal bond market.
Public expenditure and taxation are at the core of the relationship between governments and citizens. Yet transparency in fiscal policy has been relatively neglected, compared to its significance in other policy areas, notably monetary policy. This chapter first discusses what is meant by transparency, then goes on to explore the underlying rationale and theoretical models for having it. The varied experience of fiscal transparency and the role of international organizations, such as the International Monetary Fund and the Organisation for Economic Co-operation and Development, in encouraging governments to implement it are reviewed. The principles that fiscal policy should seek to follow are discussed as is its role in the policy process, and the chapter concludes by highlighting issues on which further research might focus, such as how information disclosure affects policy making and the optimal degree of transparency.
Craig D. Shoulders and Robert J. FreeMan
Winnowing out and compiling the critical financial information and reporting it on a timely and accurate basis are arduous and often controversial tasks. Starting off with a brief description of the basis of governmental accounting principles (and how they are set), this article recounts the ongoing efforts to address long-standing problems and newly emerging issues. One complexity is reporting on the separate self-balancing funds, of which there can be a multitude for an individual government. The scope and number of audits, which cost money and take time, are constraints and affect how quickly financial reports can be published. Potential regulations in the securities area may force rapid changes. Another major pressure, evolving from the profession itself, is to move governments closer to the accrual-based accounting concepts (and associated principles) used by the private sector and to achieve greater conformity with international standards.
Harley T. Duncan
This article addresses the question as to whether the United States may join many other central governments in enacting a national value-added taxes (VAT). The idea of a federal VAT, which in its final incidence operates like a national retail sales tax, is not new. The article reviews the performance of the current system of state and local retail sales taxes (RSTs) and compares this to what a “well-designed” consumption tax should look like (tax-base comprehensiveness, minimization of the taxation of intermediate products and services, destination-based taxation, and compliance and administrative costs). It concludes that state RSTs not only “fall well short” of meeting these policy goals, but also that their defects are not likely to be corrected.
Leonardo Gambacorta and Paul Mizen
Central bank policy operates first through financial markets and then through banks as they adjust their interest rates. This chapter discusses the transmission of policy in this first step of the monetary transmission mechanism, known as interest-rate pass-through. Historically, the focus of attention has been the interest-rate channel. We show the origins of this channel via a microfounded model of interest-rate setting by deposit-taking institutions that are Cournot oligopolists facing adjustment costs. We then examine other channels such as the bank lending channel and the bank capital channel and the role of central bank communications, signaling, and forward guidance over future interest rates. Each is shown to influence the setting of current short-term interest rates. The chapter closes with some issues for the future of pass-through in the transmission process.
This article analyzes leveraged buyouts and public-to-private (PTP) transactions. It studies the literature and data on announcement returns for public-to-private transactions and considers their motives. It lists the types of firms that go private, as well as the determinants of takeover premiums in leveraged buyout transactions. It also studies posttransaction value creation and the duration of private status, and views the shift to a private firm as a form of shock therapy that is used to restructure firms that create both strong short- and long-term returns. This article also addresses the questions of whether PTP transactions lead to superior organization forms compared to public firms or not.
David L. Sjoquist and Rayna Stoycheva
From broad-based taxes on sales and income and employer payrolls, to fees and charges on school lunches, medical equipment, parking, etc., few topics take us into more aspects of public economics than the study of local revenue diversification. This article provides a thorough review of this topic, bringing to the discussion new data as well as some new evidence on the measurement of the degree of revenue diversity among the states. The article begins with a set of measures as to the growth of the level and degree of revenue diversification by type of government, and, from there, it addresses the questions of “why diversify,” where diversification works well, and where, in contrast, it has led to unintended negative outcomes. It presents several reasons that justify local revenue diversification, beginning with the fundamental proposition that, just as is true for nations and states, different localities have different revenue-raising capacities.
Sylvester Eijffinger, Ronald Mahieu, and Louis Raes
In this chapter we suggest to use Bayesian ideal point estimation to analyze voting in monetary policy committees. Using data from the Riksbank we demonstrate what this entails and we compare ideal point estimates with the results from traditional approaches. We end by suggesting possible extensions.
Donato Masciandaro and Davide Romelli
This chapter investigates the endogenous evolution of central bank institutional design over the past four decades. From a theoretical perspective, it employs a stylized political economy model to highlight some key determinants of the level of central bank independence as a function of macroeconomic shocks and political economy characteristics of countries. It then employs recently developed dynamic indices of central bank design to describe the evolution of central bank independence over the period 1972–2014. In a sample of sixty-five countries, it shows that the increasing trend in central bank independence during 1972–2007 has been reversing after the 2008 financial crisis, mainly due to significant changes to the roles of central banks in banking supervision. The authors find that this evolution can be related to several macroeconomic shocks, such as inflationary, fiscal, and exchange-rate shocks.
This article focuses on the mechanisms that underlie the confidence game between government and markets in a scenario of increased capital mobility. Section 2 begins by putting the recent changes in Latin American financial markets into historical perspective. Section 3 reviews theories about the political consequences of the internationalization of domestic financial markets and discusses how these theories can illuminate the experience of emerging economies in the region. Next, it surveys major empirical findings on the consequences of financial integration in the particular case of Latin American countries. The subsequent section moves from macroconsequences of capital mobility to its microfoundations; it examines what recent work tells us about how financial markets “vote” in Latin American elections and explores the conditions under which this vote influences policymaking. The last section proposes potential venues for future research.
This article studies public equity and public corporations. It analyzes reverse leveraged buyouts, which are the initial public offerings (IPOs) of firms that have been previously bought out by professional later-stage private equity investors. It introduces the concept of reverse leveraged buyouts (RLBOs), or the initial public offerings of firms that have previously been bought out by professional later-stage private equity investors. One section provides a review of related literature, while another studies the IPO characteristics of RLBO companies. This article also discusses the monitoring of private equity in RLBO companies and the financial performance of RLBO companies.
This article surveys the landscape of state and local retirement systems and assembles a long list of policy ideas and concerns. On average, public pension funds are in trouble, and the unfunded liabilities promise to strain tight public budgets. But not all systems are having difficulties. Overall, there are many dark clouds on the horizon. What are needed are more realistic actuarial assumptions, setting contribution floors, reducing the generosity of benefit structures, and sharing more costs with employees. States facing severe underfunding of pensions need dramatic reforms. Pensions are only part of the problem: other postretirement benefits (particularly those involving health care) exacerbate the financial trauma that lies ahead. The article notes that the states with severe funding problems face unsavory choices. They should assume a lower rate of return on investments.
Edmund S. Phelps
This article addresses the following questions: What is capitalism? What is the distinctive merit of a well-functioning capitalism? Can dynamism justify capitalism? It considers how the element of instability in capitalist systems affect the argument for continuing with capitalism. This is followed by discussions of whether there are reforms that address speculative swings while causing little or no damage to economic dynamism and inclusion; address the decline in the past decade of economic dynamism while causing little or no increase in instability; and address the still insufficient levels of economic inclusion without stifling dynamism.
Serdar Yilmaz, François Vaillancourt, and Bernard Dafflon
This article lays out the economists' view of why state and local government matters. To establish the economic framework, the article systematically works through the seminal contributions of Paul Samuelson's theoretical arguments of the importance of a public-sector role for efficiency in resource allocation; Charles Tiebout's thinking on the difference between national and local public goods; Richard Musgrave's classification of the fiscal “branches” of a decentralized federalist system; and Wallace Oates's Decentralization Theorem. It is from this platform that the article proceeds to address three fundamental fiscal policy issues for a multigovernmental society (e.g., US fiscal federalism): the sorting out of expenditure responsibilities among different types of governments (“expenditure assignment”); the question of which type of government should use which type of revenue (“revenue assignment”), and what happens when, for many state and local governments, the costs of the allocation of expenditure responsibilities are greater than that which can be financed from their “own” state/local revenues (the role of “intergovernmental transfers”).