Evaluating the cost of government credit support: the OECD context
Governments throughout the OECD allocate a large share of societies' capital and risk through their credit-related activities. Hence, accurate cost estimates for credit support programmes are a prerequisite for efficient resource allocation, transparency, effective management and public oversig...
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| Format: | Article |
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Oxford University Press (OUP)
2019
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| Online Access: | http://hdl.handle.net/1721.1/120553 https://orcid.org/0000-0001-7540-936X |
| _version_ | 1826203354247725056 |
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| author | Lucas, Deborah Jean |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Lucas, Deborah Jean |
| author_sort | Lucas, Deborah Jean |
| collection | MIT |
| description | Governments throughout the OECD allocate a large share of societies' capital and risk through their credit-related activities. Hence, accurate cost estimates for credit support programmes are a prerequisite for efficient resource allocation, transparency, effective management and public oversight. I find that OECD governments generally take their cost of capital to be their own borrowing rate, rather than using a weighted-average cost of capital that includes the cost of risk borne by taxpayers and the general public in their role as equity holders. That practice, which is institutionalised in government accounting and budgetary rules, results in cost estimates for credit support that are significantly downwardly biased relative to a fair-value metric that recognises the full cost of risk. The size and possible real consequences of those distortions are illustrated with analyses of the European Bank for Reconstruction and Development, the European Stability Mechanism and the Tennessee Valley Authority. |
| first_indexed | 2024-09-23T12:35:35Z |
| format | Article |
| id | mit-1721.1/120553 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T12:35:35Z |
| publishDate | 2019 |
| publisher | Oxford University Press (OUP) |
| record_format | dspace |
| spelling | mit-1721.1/1205532022-09-28T08:52:54Z Evaluating the cost of government credit support: the OECD context Lucas, Deborah Jean Sloan School of Management Lucas, Deborah Jean Governments throughout the OECD allocate a large share of societies' capital and risk through their credit-related activities. Hence, accurate cost estimates for credit support programmes are a prerequisite for efficient resource allocation, transparency, effective management and public oversight. I find that OECD governments generally take their cost of capital to be their own borrowing rate, rather than using a weighted-average cost of capital that includes the cost of risk borne by taxpayers and the general public in their role as equity holders. That practice, which is institutionalised in government accounting and budgetary rules, results in cost estimates for credit support that are significantly downwardly biased relative to a fair-value metric that recognises the full cost of risk. The size and possible real consequences of those distortions are illustrated with analyses of the European Bank for Reconstruction and Development, the European Stability Mechanism and the Tennessee Valley Authority. 2019-02-26T20:52:40Z 2019-02-26T20:52:40Z 2014-07 2019-02-22T18:07:43Z Article http://purl.org/eprint/type/JournalArticle 0266-4658 1468-0327 http://hdl.handle.net/1721.1/120553 Lucas, Deborah. “Evaluating the Cost of Government Credit Support: The OECD Context.” Economic Policy 29, 79 (July 2014): 553–597 © 2014 CEPR, CES, MSH https://orcid.org/0000-0001-7540-936X http://dx.doi.org/10.1111/1468-0327.12034 Economic Policy Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Oxford University Press (OUP) MIT web domain |
| spellingShingle | Lucas, Deborah Jean Evaluating the cost of government credit support: the OECD context |
| title | Evaluating the cost of government credit support: the OECD context |
| title_full | Evaluating the cost of government credit support: the OECD context |
| title_fullStr | Evaluating the cost of government credit support: the OECD context |
| title_full_unstemmed | Evaluating the cost of government credit support: the OECD context |
| title_short | Evaluating the cost of government credit support: the OECD context |
| title_sort | evaluating the cost of government credit support the oecd context |
| url | http://hdl.handle.net/1721.1/120553 https://orcid.org/0000-0001-7540-936X |
| work_keys_str_mv | AT lucasdeborahjean evaluatingthecostofgovernmentcreditsupporttheoecdcontext |