Evaluating the cost of government credit support: the OECD context
Name
EconomicPolicyMFM.pdf
Size
329.83 KB
Format
Adobe PDF
Checksum (MD5)
d2f5f338c7232be621c7a71109977c74
Author(s)
Lucas, Deborah Jean
Date Issued
July 2014
Journal
Economic Policy
Publisher
Oxford University Press (OUP)
Citation
Lucas, Deborah. “Evaluating the Cost of Government Credit Support: The OECD Context.” Economic Policy 29, 79 (July 2014): 553–597 © 2014 CEPR, CES, MSH
Version
Original manuscript
Abstract
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.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1111/1468-0327.12034
