Governments’ Payment Discipline: The Macroeconomic Impact of Public Payment Delays and Arrears

By Cristina Checherita-Westphal, Alexander D Klemm, Paul Viefers

January 22, 2015

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Cristina Checherita-Westphal, Alexander D Klemm, and Paul Viefers. Governments’ Payment Discipline: The Macroeconomic Impact of Public Payment Delays and Arrears, (USA: International Monetary Fund, 2015) accessed September 27, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper considers the impact of changes in the payment discipline of governments 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. We find that payment delays and to some extent estimated arrears lead to a higher likelihood of bankruptcy, lower profits, and lower economic growth. However, 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. We again find that the likelihood of bankruptcies rises when governments increase the average payment period.

Subject: Arrears, Credit, Economic sectors, External debt, Labor, Labor force, Money, Public sector, Trade credits

Keywords: Accounts payable, Arrears, Credit, Delayed payment, Government arrears, Government spending, Labor force, Payment arrears, Payment delay, Payment duration, Payment order, Payment period, Payment term, Private sector, Public payment delays, Public sector, Trade credit, Trade credits, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/013
Stock No:

WPIEA2015013
ISBN:

9781484317020
ISSN:

1018-5941

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