Governments' payment discipline: the macroeconomic impact of public payment delays and arrears

Cristina Checherita-Westphal, Alexander Klemm and Paul Viefers
Authors registered in the RePEc Author Service: Cristina Checherita Westphal

No 1771, Working Paper Series from European Central Bank

Abstract: This paper considers the impact of changes in governments' payment discipline on the private sector. We argue that increased delays in public payments can affect private sector liquidity and profits and hence ultimately economic growth. We test this prediction empirically for European Union countries using two complementary approaches. First, we use annual panel data, including a newly constructed proxy for government arrears. Using panel data techniques, including methods that allow for endogeneity, we find that payment delays and to some extent estimated arrears lead to a higher likelihood of bankruptcy, lower profits, and lower economic growth. While this approach allows a broad set of variables to be included, it restricts the number of time periods. We therefore complement it with a Bayesian VAR approach on quarterly data for selected countries faced with significant payment delays. With this second approach, we also find that the likelihood of bankruptcies rises when the governments increase the average payment period. JEL Classification: E6, H6, H8

Keywords: accounts payable; government arrears; government spending; public payment delays (search for similar items in EconPapers)
Date: 2015-03
New Economics Papers: this item is included in nep-fdg
Note: 1790315
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Governments’ payment discipline: The macroeconomic impact of public payment delays and arrears (2016)
Working Paper: Governments’ Payment Discipline: The Macroeconomic Impact of Public Payment Delays and Arrears (2015)
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