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Loan price modelling for local governments using risk premium analysis

Author

Listed:
  • Andr鳠Navarro-Galera
  • Salvador Rayo-Cant
  • Juan Lara-Rubio
  • Dionisio Buend𫑃arrillo

Abstract

Previous studies have highlighted the question of government loan interest as one of great current importance. Government borrowing levels are high, and reducing interest payments would generate savings to meet other spending needs and/or to lower taxation, thus supporting the sustainability of public finances. However, no previous study has presented a method for a local government to calculate its own credit risk and thus be in a position to negotiate lower interest rates on its borrowing. This article defines a financial model that enables local governments to estimate the interest rate payable on a bank loan, based on their credit risk premium, in accordance with the Basel II rules and the findings of our empirical study of large local governments.

Suggested Citation

  • Andr鳠Navarro-Galera & Salvador Rayo-Cant & Juan Lara-Rubio & Dionisio Buend𫑃arrillo, 2015. "Loan price modelling for local governments using risk premium analysis," Applied Economics, Taylor & Francis Journals, vol. 47(58), pages 6257-6276, December.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:58:p:6257-6276
    DOI: 10.1080/00036846.2015.1068924
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    Cited by:

    1. Dionisio Buendía-Carrillo & Juan Lara-Rubio & Andrés Navarro-Galera & María Elena Gómez-Miranda, 2020. "The impact of population size on the risk of local government default," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(5), pages 1264-1286, October.
    2. Maria Teresa Balaguer-Coll & Mariya Ivanova-Toneva, 2019. "The impact women's leadership in local Governments: The case of Spain," Working Papers 2019/05, Economics Department, Universitat Jaume I, Castellón (Spain).
    3. Serena Santis, 2020. "The Demographic and Economic Determinants of Financial Sustainability: An Analysis of Italian Local Governments," Sustainability, MDPI, vol. 12(18), pages 1-16, September.

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