Thursday, September 27, 2012

Agbetsiafa's retracted 2012 Research in Business & Economics article





This posting shows similarities in wording between the following (now retracted) article by Douglas Abetsiafa and the works of other, earlier published authors:

Abgetsiafa, Douglas, Fiscal deficit-interest rate link: evidence from G5 countries. Research in Business and Economics Journal, Volume 5 - February, 2012.

This article was retracted by the journal.  While the journal has not made a formal announcement of the retraction, the paper is no longer available on the journal website: http://www.aabri.com/rbej.html (see Feb 2012 Issue), nor can it be found at the original link to the article http://www.aabri.com/manuscripts/11875.pdf

 Douglas Agbetsiafa is Professor of Economics and Chair of the Economics Area at Indiana University South Bend (IUSB).  He holds a PhD in Economics from the University of Notre Dame that also contains similar wording to earlier published works.

The text that follows compares wording in Dr. Agbetsiafa’s retracted Research in Business & Economics paper with wording that is largely identical to wording of others, earlier published authors.  Notably, most of the examples that follow have wording that is identical (or largely identical) to a 2010 International Monetary Fund Paper (http://www.iepecdg.com.br/uploads/artigos/1008wp10184.pdf).

Wording from Agbetsiafa paper, page 2:

Recent sharp spike in fiscal deficits and sovereign debt, especially in advanced economies, raises a number of important issues regarding their impact on short-term interest rates and long-term bond yields.  

Compare this to:

The recent sharp increase in fiscal deficits and public debt, particularly in advanced economies, raises a number of important issues regarding their impact on long-term interest rates.
See  first sentence of introduction.

Wording from Agbetsiafa paper, page 2:

Although there is a significant existing literature exploring the relationship between deficits and interest rates, there is diversity of findings.

Compare this to:

Although there is a significant existing literature exploring the relationship between deficits, public debt, and interest rates, there is a diversity of findings, and several of the specific issues explored in this paper have not been examined before.
[last sentence of first paragraph]

Wording from Agbetsiafa paper, page 2:

A key channel through which large deficits could be expected to have an impact on long- term interest rates is its impact on national savings. In the standard classical model, fiscal deficits reduce national savings and increase aggregate demand. This creates an excess supply of government debt, leading to higher real interest rates. The yield curve is also expected to become positively sloped in anticipation of continuing large deficits. Although short-term real rates reflect cyclical conditions and the stance of monetary policy, and influence real medium-and long-term rates, the latter are likely to rise more in response to the anticipated deterioration of the fiscal deficits and debt (Blanchard, 1984).

Compare this to:

A key channel through which large fiscal deficits could be expected to have an impact on long-term interest rates occurs via the impact on national savings. In the standard neoclassical model, fiscal deficits (other things given) reduce national savings and increase aggregate demand (Elmendorf and Mankiw, 1998). This creates an excess supply of government debt, leading to higher real interest rates.
The yield curve is also expected to become positively sloped in anticipation of continuing large fiscal deficits. Although short-term real interest rates reflect cyclical conditions and the stance of monetary policy, and influence real medium- and long-term rates,[2] the latter are likely to rise more in response to the anticipated worsening of fiscal deficits and debt (Blanchard, 1984)
[bottom of page 3 and top of page 4]

Wording from Agbetsiafa paper, page 3:

The conventional closed economy macroeconomic model views an increase in government spending, which is equivalent to an increase in the deficit ceteris paribus, as resulting in a higher nominal interest rate and output, given an upward-sloping LM curve. Thus a positive association exists between government spending, deficits and the interest rate. In the open economy version of the IS-LM model, often called the Mundell-Fleming model, expansionary fiscal policy generally results in higher interest rates and output, under fixed or flexible exchange rates.

Compare this to:

The conventional closed economy macroeconomic paradigm, the so-called IS-LM model, views an increase in government spending, which is equivalent to an increase in the deficit ceteris paribus, as resulting in a higher nominal interest rate (and output), given an upward sloping LM curve. Thus, a positive association exists between government spending, deficits and the interest rate.[2]  In the open economy version of the IS-LM model, called the Mundell-Fleming model, expansionary fiscal policy generally results in a higher interest rate (and output), under either fixed or flexible exchange rates, although in the former case there is a further money supply change and, in the latter, a change in the exchange rate.[3]

Wording from Agbetsiafa paper, page 3:

Nominal yields on bonds could also increase due to higher inflation expectations, particularly in an environment where output gaps are positive, or where there are concerns about monetization of debt.

Compare this to:

Nominal yields on sovereign securities could also increase due to higher inflation expectations, particularly in an environment where output gaps are positive, or where there are concerns about monetization of debt.
[page 4, start of second paragraph]

Wording from Agbetsiafa paper, page 3:

These results may not hold fully when assumptions about agents’ behavior are modified (Rebelein, 2006). If agents are forward looking, there may be some “Ricardian equivalence” with private saving increasing as fiscal deficits increase, in anticipation of future tax increases to fulfill the inter-temporal budget constraint.

Compare this to:

These results may not hold fully when assumptions about agents’ behavior are modified (Rebelein, 2006). If agents are forward looking, there may be some “Ricardian equivalence” with private saving increasing, as fiscal deficits increase, in anticipation of future tax hikes to fulfill the intertemporal budget constraint.
[page 4, start of third paragraph]

Wording from Agbetsiafa paper page 3:

If taxes are non-distortionary and individuals are heterogeneous (Mankiw, 2000), debt accumulation can be consistent with a short-term rise in interest rates, but would not have a pronounced impact on bond yields in the long-run.[1] Additional factors may weaken the link between deficits and interest rates. For example, in an open economy, domestic savings may be complemented over a period of time by capital inflows (Feldstein, 1986a) leading to real exchange rate appreciation rather than higher interest rates in response to lower government savings. It is unclear, however, to what extent large deficits could be financed by foreign savings on a sustained basis, so that eventually higher deficits may still have an impact in domestic bond yields. In an earlier comprehensive study, Gale and Orszag (2002) summarized the conclusions of almost 60 studies: of these fifty percent found a “predominantly insignificant” effect of fiscal deficits on interest rates and the other fifty percent a “mixed “or “predominantly insignificant” effect.[2] A similar conclusion was reached by Engen and Hubbard (2004). See Kumar and Woo (2010) for a complimentary analysis of the adverse effect of large public debt on potential growth.

Compare this to:

If taxes are nondistortionary and individuals are heterogeneous (Mankiw, 2000), debt accumulation can be consistent with a short-run rise in interest rates, but may not have a pronounced impact on bond yields in the long run.[5] Additional factors may weaken the link between debt, deficits, and interest rates. For instance, in an open economy, domestic savings may be complemented over a period of time by capital inflows (Feldstein, 1986a) leading to real exchange rate appreciation rather than higher real interest rates in response to lower government savings. It is unclear, however, to what extent large deficits and debts could be financed by foreign savings on a sustained basis, so that eventually higher deficits may still have an impact on domestic bond yields.

Existing studies
Given the above a priori considerations, it is perhaps not surprising that there has been a heterogeneity of findings regarding the impact of fiscal deterioration on interest rates. Many country-specific and cross-country studies have found a diversity of results. In an earlier comprehensive survey, Gale and Orszag (2002) summarized the conclusions of almost 60 studies: of these, around one-half found a “predominantly positive significant” effect of fiscal deficits on interest rates and the other half a “mixed” or “predominantly insignificant” effect.[6]
See pages 4 to 5.
FOOTNOTE 7: See also Kumar and Woo (2010) for a complementary analysis of the adverse impact of large public debt on potential growth (in part due to the impact of debt on interest rates).

Wording from Agbetsiafa paper, page 3 (footnote):

In his model with heterogeneous individuals, temporary tax cuts initially crowd out capital accumulation as agents’ disposable incomes rise, leading to higher private consumption. However, with investment falling as a result of lower savings, the marginal product of capital and interest rate would rise. This provides incentives for higher savings until the marginal product of capital is restored. Therefore, in the medium term, interest rates return to the optimal level even if public debt is permanently higher.

Compare this to:

In his model with heterogeneous individuals, temporary tax cuts initially crowd out capital accumulation as agents’ disposable incomes rise, leading to higher private consumption. However, with investment falling as a result of lower savings, the marginal product of capital and interest rate would rise. This provides incentives for higher savings until the optimal level of the marginal product of capital is restored. Therefore, in the medium term, interest rates return to the optimal level even if public debt is permanently higher.

Wording from Agbetsiafa paper, page 3 (second footnote):

… of fiscal expansion (e.g. , because of foreign capital savings replacing domestic savings) economic performance may still be negatively affected by persistent fiscal imbalances as capital stock accumulation declines (either because of a fall in domestic or foreign net investment).

Compare this to:

Gale and Orszag (2002) argue that even when interest rate do not increase as a result of fiscal expansions (e.g., because of foreign capital savings replacing domestic savings) economic performance may still be negatively affected by persistent fiscal imbalances as capital stock accumulation declines (either because of a fall in domestic or foreign net investment).

Wording from Agbetsiafa paper, page 4:

… Estimated coefficients are considerably larger and found more frequently when expected deficits are used (see, for example Feldstein, 1986b). Findings by other researchers also point to a positive relation between fiscal deficits and long-term interest rates, when there is uncertainty on the composition of fiscal policy (Balduzzi, Corsetti, and Foresi, 2007). Ardagna (2009) explores the behavior of government (and corporate) bond yields in times of large changes in fiscal position for the OECD countries (over the period 1960-2992). She finds that 10-year nominal yields on government bonds increased by 180 basis points during the years in which the primary fiscal deficit widened by more than one-and-a-halve percent of GDP in one year or 1 per cent of GDP per year in two consecutive years.

Compare this to:

It is considerably larger and found more frequently when expected deficits (Feldstein, 1986b)[8] are used.[9] Results also point to a positive relation between fiscal deficits and long-term interest rates when there is uncertainty on the composition of fiscal policy (Balduzzi, Corsetti, and Foresi, 2007).[10] Ardagna (2009) explores the behavior of government (and corporate) bond yields in times of large changes in the fiscal stance for the OECD countries (over the period 1960–2002). She finds that 10-year nominal yields on government bonds increased by more than 180 basis points during years in which the primary fiscal deficit widened by more than 11⁄2 percent of GDP in one year or
1 percent of GDP per year in two consecutive years (the definition of “large change” in fiscal stance is consistent with Alesina and Perotti, 1995).[11]

Wording from Agbetsiafa paper, page 4:

Cross-section studies indicate a smaller impact than analysis of individual countries. The difference may be due to pooling of the country specific data, and the coefficients are heterogeneously affected by institutional and structural factors which are generally not explicitly taken into account in many of such studies.

Compare this to:

Studies for a cross-section of economies indicate a smaller impact than analysis of individual countries. This may be because in the pooling of data, country-specific coefficients tend to be heterogeneously affected by institutional and structural factors, which are generally not explicitly taken into account in many of the studies.

Wording from Agbetsiafa paper, page 4:

Also, countries with large debt accumulation tend to be more at risk of inflationary pressures raising governments will be less able to service their liabilities, and therefore increase credit risk. Also, nominal short-term interest rates. These factors affect the long end of the term structure, and raise borrowing cost for long-term government securities nonlinearly3
A number of studies have considered the impact of public debt on credit risk spreads in countries sharing the same currency to avoid the risk that expectations regarding exchange rates may affect the results. For instance, some studies have examined the spread of European Union sovereign yields over the German bonds, and found that an increase in public debt has a significant but small impact on bond yields. However, this result holds only in countries with high debt levels (Paesani, Strauch, and Kremer, 2006.)

Compare this to:

Also, countries with large debt accumulation tend to be more at risk of inflationary pressures raising nominal short-term interest rates. These factors affect the long end of the term structure and raise borrowing cost for long-term government securities nonlinearly.[13]
A number of studies have considered the impact of public debt on credit risk spreads in countries sharing the same currency to avoid the risk that expectations regarding exchange rates may affect the results. For instance, some studies have examined the spread of EU sovereign yields over the German bonds, and found that an increase in public debt has a significant but small impact on bond yields. However, this result holds only in countries with high debt levels (Paesani, Strauch, and Kremer, 2006).[14]

Wording from Agbetsiafa paper, pages 6-7:

Some of these differences in the findings may be accounted for by country-specific factors such as nonlinear effects of large fiscal deterioration and the country’s conditions of the deficit, the country’s institutional set up, and the possible exposure and spillovers from other global financial markets.
These domestic and international factors are likely to determine the magnitude of the impact of the deficits on interest rates.

Compare this to:

It complements and extends the existing literature by exploring in particular the nonlinear effects of large fiscal deterioration and initial fiscal conditions, the impact of countries’ institutional set up, and the likely spillovers from global financial markets. The evidence shows that large deficits and debt can have a marked adverse impact on bond yields, but that a variety of domestic and international factors are likely to determine the magnitude of this impact.


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