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 Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

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: Developing a digital twin

University of Texas and MIT researchers create virtual UAVs that can predict vehicle health, enable autonomous decision-making

In the not too distant future, we can expect to see our skies filled with unmanned aerial vehicles (UAVs) delivering packages, maybe even people, from location...

Im Focus: The coldest reaction

With ultracold chemistry, researchers get a first look at exactly what happens during a chemical reaction

The coldest chemical reaction in the known universe took place in what appears to be a chaotic mess of lasers. The appearance deceives: Deep within that...

Im Focus: How do scars form? Fascia function as a repository of mobile scar tissue

Abnormal scarring is a serious threat resulting in non-healing chronic wounds or fibrosis. Scars form when fibroblasts, a type of cell of connective tissue, reach wounded skin and deposit plugs of extracellular matrix. Until today, the question about the exact anatomical origin of these fibroblasts has not been answered. In order to find potential ways of influencing the scarring process, the team of Dr. Yuval Rinkevich, Group Leader for Regenerative Biology at the Institute of Lung Biology and Disease at Helmholtz Zentrum München, aimed to finally find an answer. As it was already known that all scars derive from a fibroblast lineage expressing the Engrailed-1 gene - a lineage not only present in skin, but also in fascia - the researchers intentionally tried to understand whether or not fascia might be the origin of fibroblasts.

Fibroblasts kit - ready to heal wounds

Im Focus: McMaster researcher warns plastic pollution in Great Lakes growing concern to ecosystem

Research from a leading international expert on the health of the Great Lakes suggests that the growing intensity and scale of pollution from plastics poses serious risks to human health and will continue to have profound consequences on the ecosystem.

In an article published this month in the Journal of Waste Resources and Recycling, Gail Krantzberg, a professor in the Booth School of Engineering Practice...

Im Focus: Machine learning microscope adapts lighting to improve diagnosis

Prototype microscope teaches itself the best illumination settings for diagnosing malaria

Engineers at Duke University have developed a microscope that adapts its lighting angles, colors and patterns while teaching itself the optimal...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

The Future of Work

03.12.2019 | Event News

First International Conference on Agrophotovoltaics in August 2020

15.11.2019 | Event News

Laser Symposium on Electromobility in Aachen: trends for the mobility revolution

15.11.2019 | Event News

 
Latest News

Solving the mystery of carbon on ocean floor

06.12.2019 | Earth Sciences

Chip-based optical sensor detects cancer biomarker in urine

06.12.2019 | Life Sciences

A platform for stable quantum computing, a playground for exotic physics

06.12.2019 | Information Technology

VideoLinks
Science & Research
Overview of more VideoLinks >>>