Government debt and monetary policy

What is government debt?

Government (or public or national) debt is the debt owed by a central government.

what is the government deficit?

the annual "government deficit" refers to the difference between government receipts and spending in a single year, that is, the increase of debt over a particular year.

How government debt can be categorized?

internal debt and external debt

What is internal debt?

debt owed to lenders within the country

What is external debt?

debt owed to foreign lenders

What is sovereign debt?

It usually refers to government debt that has been issued in a foreign currency.

How governments borrow money?

by issuing securities, government bonds and bills. Less creditworthy countries sometimes borrow directly from a supranational organization (e.g. the World Bank) or international financial institutions.

What government debt is used for?

is one of many methods of financing government operations.

What the practice of monetizing debt is all about?

This practice reduces government interest costs rather than canceling government debt, and can result in hyperinflation if used unsparingly.

What is the role of the central bank in monetizing the debt?

central banks may buy government bonds in order to finance government spending, thereby monetizing the debt.

What is the government implicit debt?

is the promise by a government of future payments from the state. Usually this refers to long term promises of social payments such as pensions and health expenditure; not promises of other expenditure such as education or defense

What is PAYGO system?

Financing expenditures with funds that are currently available rather than borrowed.

What governments spendings consist of?

tax revenues + change in government debt held by public + change in monetary base held by the public

What is the most accepted measure of assessing a nation's debt?

Debt to GDP ratio

What is debt to GDP ratio?

It is one of the indicators of the health of an economy. It is the amount of national debt of a country as a percentage of its Gross Domestic Product (GDP).

What is the interpretation of the debt to GDP ratio?

A low debt-to-GDP ratio indicates an economy that produces a large number of goods and services and probably profits that are high enough to pay back debts.

How changes of inflation affect GDP?

In the presence of significant inflation, or particularly hyperinflation, GDP may increase rapidly in nominal terms; if debt is nominal, then its ratio to GDP will decrease rapidly. A period of deflation would have the opposite effect.

What is a government bond?

It is a bond issued by a national government. Such bonds are often denominated in the country's domestic currency. Government bonds are sometimes regarded as risk-free bonds, because national governments can raise taxes or reduce spending up to a certain point; in many cases they "print more money" to redeem the bond at maturity.

What are sovereign bonds?

Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds.

What types of interest rates do we have?

fixed and floating

public debt on the primary market

Government Bonds are often issued via auctions at Stock Exchanges. There are several different methods of issuing most often auctions are used. There are two different methods of the payments: at the beginning and at the end.

public debt on the secondary market

The G-bonds are traded at Stock Exchanges. There are two types of trading: Outright and Repos.

Why lending to a government is considered risk-free?

because, in theory, the debt and interest can be repaid by raising tax revenues (either by economic growth or raising tax rates), a reduction in spending, or even by simply printing more money.

Can market interest rate be different for debts of different countries?

yes, the yield required by the market is higher for some countries' debt than for others. This reflects the views of the market on the relative solvency of the various countries and the likelihood that the debt will be repaid.

The Bretton Woods agreements agreements set the policies for?

the Bank for International Settlements (BIS), International Monetary Fund (IMF), and World Bank.

When analysing risk of public debt we need to?

Assess the expected value of any public asset being constructed, Determine whether any public debt is being used to finance consumption, Determine whether triple bottom line issues are likely to lead to failure or defaults of governments, Determine whether any of the debt being undertaken may be held to be odious debt, Determine if any future entitlements are being created by expenditures

What would happen if higher marginal tax rates were used to pay rising interest costs?

Savings would be reduced and work would be discouraged

What would be a consequence of rising interest costs?

it would force reductions in government programs

What risk factors are there in USA?

Restrictions to the ability of policymakers to use fiscal policy to respond to economic challenges; An increased risk of a sudden fiscal crisis, in which investors demand higher interest rates.

Debt levels may affect economic growth rates - is that truth?

Yes, when debt is high, GDP is low.

What is the conclusion about countries with high debt?

Countries with debt above 80 percent of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration

What may be a bigger factor than government debt in predicting interest rates?

The statistical relationship between a higher trade deficit and higher interest rates was stronger for several troubled Eurozone countries, indicating significant private borrowing from foreign countries

What are the predictions for spendings?

Between 2030 and 2040 mandatory spending will exceed government revenues.

Causes of Greek crisis according to greeks.

Slowing GDP growth; High Government deficit; High Government debt-level; Low Budget compliance; Low Statistical credibility;