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Explicit government guarantees and subnational borrowing costs

The Dutch case: three empirical studies.
PhD ceremony:Mr B.J.F. (Bernard) van Ommeren
When:October 31, 2019
Supervisors:prof. dr. M.A. (Maarten) Allers, prof. dr. J.J.A. Leenaars
Where:Academy building RUG
Faculty:Economics and Business

This thesis presents three studies that are carried out in the unique Dutch setting where subnational governments (SNGs) may borrow with explicit government guarantees. The mainstream literature holds that guarantees are undesirable because they evoke moral hazard leading to unsustainable debt levels. With our first study, we challenge this view and investigate to what extent guarantees help lower interest rates, and whether the system has proven sustainable. Attention is paid to the inextricably linked Dutch institutional setting and borrowing practice of SNGs. In many countries, the size of local government is increasingly thought to lack the necessary scale to operate efficiently. This is a highly important issue. Two possible solutions to this problem are amalgamation and intermunicipal cooperation. The second study applies a novel methodology to shed light on the efficiency implications of this choice.A much discussed issue in many financial departments of municipalities is whether the right timing of a loan can help lower interest rates. This is the subject of the latter study. Five strategies that are easy to implement at low costs are simulated to clarify whether some outperform others. The strategies include the optimal stopping algorithm for the famous secretary problem, where the best secretary must be selected from n applicants. We find that there are substantial differences between the performance of these strategies and that the policy implications will depend strongly on the goal one wants to achieve.