Joshua Aizenman, Hiro Ito, 27 October 2020

The economic policies of the US in the post-COVID era will have important implications for the global economy. This column outlines two different exit strategies for the US from the COVID-related debt-overhang and analyses their implications for emerging markets and global stability. A strategy of continuing loose fiscal policies and accommodating monetary policies may spur short-term growth but would also increase the risks a deeper crisis in the future. Alternatively, the US could adopt a two-pronged approach of shifting fiscal priorities towards expenses with high social payoffs and then promoting fiscal adjustments aimed at a primary surplus and debt resilience. The post-WWII success story illustrates the feasibility of, and gains from, a two-pronged fiscal strategy.

Andrea Presbitero, Ursula Wiriadinata, 05 August 2020

As interest rate-growth differentials (r-g) have turned negative in many countries, now could be the time for governments to pursue fiscal expansions. However, the downside risks of such policies should not be disregarded. Using a large sample of economies, this column finds that high and increasing public debts, especially when denominated in foreign currencies, can lead to more volatile r-g dynamics. In particular, this is associated with higher probabilities of r-g reversals, tail risks, and an increased exposure to domestic and global shocks. Policymakers should take note of these risks when designing future fiscal expansions.

John Hassler, Per Krusell, Morten Ravn, Kjetil Storesletten, 07 July 2020

The responses to Covid-19 have had direct economic consequences of historic proportions. In reaction to this challenge, this column was prepared by four main authors and then discussed within a large group of research-active macroeconomists who also signed the final document. The column discusses the nature of the shock and the challenges for economic policy in Europe in the current and next phases of the crisis. In addition to outlining some basic principles for guiding domestic economic policy, it also calls for clear communication of policy to minimise uncertainty, for cooperation across countries along several dimensions, and for a clear and unified strategy in the management of national debts.

Yuliya Kasperskaya, Ramon Xifré, 01 July 2020

In the aftermath of crises, the state of public finances typically regains prominence in policy agendas. This column advances the hypothesis that three properties of the budgetary setup – reliability of projections, openness to scrutiny, and transparency – facilitate the exercise of the ‘budgetary analytical capacities’ of the government, legislature, and the wider public. It constructs an index of such capacities from the OECD Survey on Budget Practices. For the period 2012-2016, a simple measure of fiscal discipline is correlated with the index and is not correlated with other standard political-economy variables that are generally used to explain fiscal discipline.

Sebastian Barnes, Eddie Casey, 09 June 2020

The Covid-19 crisis has highlighted the role of fiscal policy and transformed the outlook for public finances. This column explores economic and fiscal scenarios for a small euro area country to 2025. Due to the high uncertainty, it argues for a state-contingent approach to policy. Low interest rates, if maintained, along with ‘high-altitude’ debt dynamics could create substantial headroom for the fiscal response and make future adjustments to put the debt ratio on a downward path more manageable.

Çağatay Bircan, Ralph De Haas, Helena Schweiger, Alexander Stepanov, 03 June 2020

As lockdown measures continue, or are relaxed only gradually, many small businesses continue to experience significantly reduced turnover. This column reports on a firm-level analysis across 16 emerging markets, and three Western European comparator countries, in order to gauge the potential risks associated with debt-driven COVID-19 support. The overall goal is to prevent a wave of bankruptcies that could break valuable relationships between firms and their suppliers and employees. However, liquidity support in the form of additional bank lending may create debt-overhang problems in the future and therefore requires careful targeting.

Anil Ari, Sophia Chen, Lev Ratnovski, 30 May 2020

Non-performing loans are a crucial policy consideration, especially in times of wider economic crisis. This article uses a new database covering 88 banking crises since 1990 to draw lessons for post-COVID-19 resolution of non-performing loans.  Compared to the 2008 crisis, the pandemic poses some different challenges. Despite some respite from the credit-crash of 2008, policymakers today are faced with substantially higher public debt, less profitable banks, and often weaker corporate sector conditions, making resolution of non-performing loans even more challenging.

Olivier Darmouni, Oliver Giesecke, Alexander Rodnyansky, 20 May 2020

The share of firms’ borrowing from bond markets has been rising globally. This column argues that euro area companies with more bond debt are disproportionately affected by surprise monetary shocks, compared to firms with mostly bank debt. This finding stands in contrast to the predictions of a standard bank lending channel and points toward frictions in bond financing. This provides lessons for the conduct of monetary policy in times of hardship such as COVID-19, when the corporate sector suffers from liquidity shortages.

Kevin Daly, Tadas Gedminas, Clemens Grafe, 20 May 2020

Although the COVID-19 crisis is a global phenomenon, emerging market economies are in a weaker position than developed economies to absorb its fiscal costs. This column assesses the impact of the crisis on government deficits and debt levels in emerging markets, and the fiscal adjustments that are likely to be required in the aftermath of the crisis. The findings suggest that median government debt will rise by around ten percentage points of GDP and that most emerging economies will face painful post-crisis adjustments. The results also imply a strikingly wide range of outcomes across emerging economies around the world.

Alina Kristin Bartscher, Moritz Kuhn, Moritz Schularick, 18 May 2020

Household debt-to-income has quadrupled in the US since WWII. This column presents historical evidence suggesting that debt-to-income ratios have risen most dramatically for middle-class households with low income growth. Middle-class households have increasingly tapped into rising housing wealth to finance spending in excess of income. Home-equity based borrowing accounts for 50% of the increase in US housing debt and turned the middle-class into the epicentre of financial fragility. 

Charles Goodhart, Duncan Needham, 16 May 2020

The COVID-19 crisis presents a multi-faceted challenge to policymakers. A combination of declining commodity prices, the rise in unemployment, and emergency state spending are all set to create challenging economic conditions, even as the pandemic itself subsides. This column argues that one mechanism that could help control long-run inflation levels is the issuance of long-dated gilts. This would also help to protect the young and unborn generations from the threat of resurgent inflation, which could lead to a massive rise in their future debt service requirements. 

Giancarlo Corsetti, Aitor Erce, Antonio Garcia Pascual, 14 May 2020

Prominent voices propose financing the European Recovery Fund using joint perpetual debt. This column argues that there are gains from using European borrowing and lending as two separate policy levers. In a world of ultra-accommodative monetary policy, financing the Fund issuing debt at shorter maturities and passing those low interest rates onto member states through loans with low margin and with very long maturities is financially cheaper. Supporting the recovery through this maturity transformation would reinforce debt sustainability across the EU.

Jamus Lim, 11 May 2020

Large fiscal expenditures, as well as more loans by households and firms, will lead to sharp increases in public and private debt in the near future. The resulting debt burdens may impact both post-lockdown economic recovery and medium-run growth prospects. This column presents evidence on the effects of the total debt burden on output dynamics. The results suggest increases in total debt to GDP have significant negative effects on growth. Helping economies recover from the dramatic COVID-19 shock will require tackling both public and private borrowing. 

Erica Bosio, Simeon Djankov, 06 May 2020

With lockdown measures in place almost worldwide now, cash-flow represents a significant concern for firms across multiple sectors. It remains to be seen exactly which types of business will be able to weather the coming storm. This column estimates the survival time of nearly 7,000 firms in a dozen Southern European and emerging market economies. Under the assumptions that firms have no incoming revenues, the median survival time across industries ranges from 8 to 19 weeks. Once collapsed export demand is taken into account, the median survival time falls to between 8 and 14 weeks.

Silvia Marchesi, Tania Masi, 04 May 2020

As a consequence of the COVID-19 crisis, which will hit certain countries particularly hard (including those with official creditors), there may be a wave of debt restructuring over the next few years. This column argues that the specific characteristics of sovereign debt re-negotiations are important. In particular, it focuses on the link between sovereign restructurings and ratings, an issue that is of relevance but that has not received enough attention in recent research. 

Juanita Gonzalez-Uribe, Su Wang, Simeon Djankov, 30 April 2020

Loan guarantees to small businesses are emerging as a main policy response during the COVID-19 crisis. Using evidence from the UK’s Enterprise Finance Guarantee scheme from 2009, this column argues that such policies enable some financially constrained firms to retain workers that otherwise would have been laid off, and whose retention was fundamental in rebuilding the businesses post-crisis. However, less-educated workers in jobs with low training costs are more likely to be laid off, implying that the guarantee policy is regressive. 

Tatiana Didier, Federico Huneeus, Mauricio Larrain, Sergio Schmukler, 24 April 2020

The COVID-19 pandemic has nearly halted economic activity worldwide. Firm cash flows have collapsed, triggering inefficient bankruptcies as firms' valuable relationships are broken. This column proposes hibernation could allow firms to survive the pandemic, while preserving their vital relationships. All stakeholders could share the burden of economic inactivity, helping more firms to survive. However, financial systems are not well equipped to handle this type of exogenous and synchronised systemic shock so governments should work with the financial sector to keep firms afloat.

Giorgio Gobbi, Francesco Palazzo, Anatoli Segura, 15 April 2020

Most governments have introduced temporary credit guarantees to ensure banks can provide the liquidity needed by firms during the Covid-19 crisis. This column argues that these policies create incentives for banks to foreclose guaranteed loans maturing close to the expiration date of the guarantee scheme. This hidden effect is worse for firms whose debt is set to substantially increase during the pandemic. To avoid foreclosure ‘waves’ on the eve of the public guarantee termination, complementary measures that reduce firms’ debt burden should also be adopted.

Sebastian Horn, Josefin Meyer, Christoph Trebesch, 15 April 2020

The introduction of European Coronabonds is sometimes described as an unprecedented step that would create a dangerous precedent of debt mutualisation. This column shows that this view is wrong and ignores the history of European financial cooperation. Since the 1970s, the European Commission has placed more than a dozen community bonds on private markets, which were guaranteed by the member states and distributed to countries in crisis. These bonds have been fully repaid in the past. Coronabonds with joint and several liability go a step further, but they would stand in a long tradition of European financial solidarity and cooperation.

Daniel Gros, 05 April 2020

The countries hit hardest by the COVID-19 crisis already have too much debt. Lending from the European Stability Mechanism or via Coronabonds would add to that debt, potentially making it unsustainable. This column suggests that European solidarity should take the form of transfers, not credit. A substantial transfer could be organised via the EU budget simply by exempting the weakest countries from their contributions to the EU budget for the duration of the programming period 2012-2027.

Pages

Vox eBooks

Events

CEPR Policy Research