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

In: Checherita-Westphal, Cristina, Klemm, Alexander orcid:0000-0002-9892-3182 and Viefers, Paul (2016). Governments' payment discipline: The macroeconomic impact of public payment delays and arrears. J. Macroecon., 47. S. 147 - 166. AMSTERDAM: ELSEVIER SCIENCE BV. ISSN 1873-152X

Open Access

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: (C) 2015 Elsevier Inc. All rights reserved.