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:
Matt McGowan | Newswise Science News
Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)
Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO
An international team of scientists has proposed a new multi-disciplinary approach in which an array of new technologies will allow us to map biodiversity and the risks that wildlife is facing at the scale of whole landscapes. The findings are published in Nature Ecology and Evolution. This international research is led by the Kunming Institute of Zoology from China, University of East Anglia, University of Leicester and the Leibniz Institute for Zoo and Wildlife Research.
Using a combination of satellite and ground data, the team proposes that it is now possible to map biodiversity with an accuracy that has not been previously...
Heatwaves in the Arctic, longer periods of vegetation in Europe, severe floods in West Africa – starting in 2021, scientists want to explore the emissions of the greenhouse gas methane with the German-French satellite MERLIN. This is made possible by a new robust laser system of the Fraunhofer Institute for Laser Technology ILT in Aachen, which achieves unprecedented measurement accuracy.
Methane is primarily the result of the decomposition of organic matter. The gas has a 25 times greater warming potential than carbon dioxide, but is not as...
Hydrogen is regarded as the energy source of the future: It is produced with solar power and can be used to generate heat and electricity in fuel cells. Empa researchers have now succeeded in decoding the movement of hydrogen ions in crystals – a key step towards more efficient energy conversion in the hydrogen industry of tomorrow.
As charge carriers, electrons and ions play the leading role in electrochemical energy storage devices and converters such as batteries and fuel cells. Proton...
Scientists from the Excellence Cluster Universe at the Ludwig-Maximilians-Universität Munich have establised "Cosmowebportal", a unique data centre for cosmological simulations located at the Leibniz Supercomputing Centre (LRZ) of the Bavarian Academy of Sciences. The complete results of a series of large hydrodynamical cosmological simulations are available, with data volumes typically exceeding several hundred terabytes. Scientists worldwide can interactively explore these complex simulations via a web interface and directly access the results.
With current telescopes, scientists can observe our Universe’s galaxies and galaxy clusters and their distribution along an invisible cosmic web. From the...
Temperature measurements possible even on the smallest scale / Molecular ruby for use in material sciences, biology, and medicine
Chemists at Johannes Gutenberg University Mainz (JGU) in cooperation with researchers of the German Federal Institute for Materials Research and Testing (BAM)...
19.06.2017 | Event News
13.06.2017 | Event News
13.06.2017 | Event News
28.06.2017 | Physics and Astronomy
28.06.2017 | Physics and Astronomy
28.06.2017 | Health and Medicine