Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Debt-Ceiling Battles Have Little Effect on Financial Market

26.10.2011
The recent conflict between Congress and President Barack Obama over raising the federal debt ceiling caused many economists and policymakers to fret that the financial markets would assess a higher risk premium on U.S. Treasury securities.

However, a University of Arkansas finance study suggests that financial markets increasingly regard such controversies as political posturing rather than serious threats to the economy and therefore the conflicts have not recently caused higher default-risk premiums in the long-term.

Findings from the study, which was published in the Journal of Banking and Finance, were recently cited by the New York Times, Washington Post, and a report to Congress by the U.S. General Accountability Office.

“Markets appear to shrug off these recurring controversies because investors believe that eventually policymakers will settle the disputes and avoid default,” said Pu Liu, finance professor in the Sam M. Walton College of Business. “Rational investors take these political controversies into account in pricing Treasury securities, but they tend to disregard them because they know the controversies will be settled before there is any real effect on the economy.”

Prior to the 1995-1996 debt-ceiling controversy between the White House and Congress, Treasury securities had been considered immune from default risk, based on the assumption that the federal government could repay its debt by imposing additional taxes or printing money. That assumption was smashed, however, when the financial market imposed a default-risk premium on Treasury securities as a result of that controversy. Since that time, the federal government has experienced four other similar debt-ceiling controversies, including the one settled in early August.

Default-risk premiums add interest on debt owed, which would significantly weaken an already struggling U.S. economy. For example, with a debt of $10 trillion, which the United States reached in September 2008, each additional basis point in the risk premium translates into $1 billion in additional annual interest expense to the Treasury. Congress can avoid this risk and the additional expense by raising the debt limit in a timely manner.

Liu and colleagues Yinging Shao, a graduate of the doctoral program in finance, and Tim Yeager, finance professor, examined responses of the financial market to four post-1996 debt-ceiling controversies. The researchers analyzed the responses by calculating the difference in yield between high-quality financial commercial paper and Treasury bills from Nov. 14, 2001, to June 16, 2006. The first date was three months before the debt-ceiling controversy of 2002, and the second date was three months after the resolution of the 2006 crisis, which had been the most recent until this year’s controversy.

Liu and colleagues found that the risk premium on Treasury securities, which disappeared after the 1995-1996 incident, resurfaced for the next two debt-ceiling controversies. But for these two incidents, the financial market charged only a small default-risk premium to Treasury securities. The researchers found no significant evidence of risk premiums in the last two occurrences.

“These findings show that the debt-ceiling controversies have had only small and temporary impact on the federal budget,” Liu said. “The repeated political stalemates have had few real economic consequences.”

Liu is chair of the finance department in the Walton College. He also holds the Harold Dulan Chair in Capital Formation and the Robert E. Kennedy Chair in Finance. Yeager is holder of the Arkansas Bankers Association Chair in Banking.

CONTACTS:
Pu Liu, professor and chair; department of finance
Sam M. Walton College of Business
479-575-6095, pliu@walton.uark.edu
Matt McGowan, science and research communications officer
University Relations
479-575-4246, dmcgowa@uark.edu

Matt McGowan | Newswise Science News
Further information:
http://www.uark.edu

Further reports about: Banking Battles Chair Debt-Ceiling Finance Financial Planner Treasury effect

More articles from Business and Finance:

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Neutron star merger directly observed for the first time

University of Maryland researchers contribute to historic detection of gravitational waves and light created by event

On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...

Im Focus: Breaking: the first light from two neutron stars merging

Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.

Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....

Im Focus: Smart sensors for efficient processes

Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).

When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...

Im Focus: Cold molecules on collision course

Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.

How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...

Im Focus: Shrinking the proton again!

Scientists from the Max Planck Institute of Quantum Optics, using high precision laser spectroscopy of atomic hydrogen, confirm the surprisingly small value of the proton radius determined from muonic hydrogen.

It was one of the breakthroughs of the year 2010: Laser spectroscopy of muonic hydrogen resulted in a value for the proton charge radius that was significantly...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ASEAN Member States discuss the future role of renewable energy

17.10.2017 | Event News

World Health Summit 2017: International experts set the course for the future of Global Health

10.10.2017 | Event News

Climate Engineering Conference 2017 Opens in Berlin

10.10.2017 | Event News

 
Latest News

Terahertz spectroscopy goes nano

20.10.2017 | Information Technology

Strange but true: Turning a material upside down can sometimes make it softer

20.10.2017 | Materials Sciences

NRL clarifies valley polarization for electronic and optoelectronic technologies

20.10.2017 | Interdisciplinary Research

VideoLinks
B2B-VideoLinks
More VideoLinks >>>