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.

Heikki Oksanen, 20 July 2020

One of the many reasons for slow progress with reforming the euro has been a lack of understanding of the links between the fiscal and monetary domains. This column argues that the Covid-19 shock necessitates a significant extension of the time horizon for fiscal policy.  Sound public finances means long-term sustainability of government finances, which is required for refunding public debt at acceptable interest rates. Bonds issued by the solvent governments are needed for the operations of the Eurosystem in setting the monetary stance and in acting as the lender of last resort for euro area governments, which is necessary for preventing liquidity shortages from developing into a general financial crisis.

Timo Löyttyniemi, 30 April 2020

The Covid-19 crisis is raising the financial burden for governments in Europe and worldwide. The current focus is on short-term immediate actions and targeted financial benefits to minimise the negative economic impacts. Soon the discussion will focus on how to manage the sovereign debt burden. In Europe, the public debate has centred around Coronabonds, while inflationary solutions have also been receiving academic attention. This column argues that a more practical solution is to introduce simple, temporary ‘coronataxes’ over the next five to ten years. These taxes could be implemented nationally and supported by European-level coordination.

Cédric Tille, 11 April 2020

The adoption of a debt brake rule in the late 1990s has led to a reduction of Swiss government debt. In fact, Switzerland seems to have a problem of too little debt. This column argues that instead of reducing its debt level further, which in the current configuration amounts to investing at a negative interest rate, Switzerland has several more appealing options.

Xavier Debrun, Jonathan D. Ostry, Tim Willems, Charles Wyplosz, 09 December 2019

Knowing whether public debt is sustainable is as critical for economists analysing fiscal policy as for practitioners tasked with charting desirable policy paths. However, because sustainability is intimately related to the government’s ability to honour all its current and future obligations, it is purely forward-looking and assessing it amounts to making a prediction about an unknowable future. This column fleshes out three principles guiding the design and implementation of sound debt sustainability frameworks: relevance, simplicity and transparency.

Yi Huang, Ugo Panizza, Richard Varghese, 04 December 2019

Establishing the presence of a causal link from public debt to economic growth and investment has proved challenging. This column uses data for nearly 550,000 firms in 69 countries to show that government debt affects corporate investment by tightening the credit constraints faced by private firms. Higher levels of public debt increase the correlation between investment and cashflow for firms that are more likely to be credit constrained – i.e. unlisted, small, and young firms – but appear to have no effect on the correlation between cash and investment of listed, well-established, and large firms.

Paul De Grauwe, Yuemei Ji, 14 October 2019

With an economic slowdown looming in the euro area, how should fiscal policies respond? This column uses a behavioural macroeconomic framework to investigate the trade-offs between stabilising output and public debt. It proposes that, when the interest rate is lower than the growth rate of the economy, fiscal policy can be used as a tool for output stabilisation while keeping public debt stable. It argues that many EU countries have the fiscal space to stimulate their economies, which could help in preventing a recession.

Rashad Ahmed, Joshua Aizenman, Yothin Jinjarak, 28 June 2019

Countries have significantly increased their public-sector borrowing since the Global Crisis. This column documents several potential fiscal dominance effects during 2000-17 under inflation targeting and non-inflation-targeting regimes. A higher ratio of public debt to GDP is associated with lower policy interest rates in advanced economies. In emerging economies under non-inflation-targeting regimes, composed mostly of exchange-rate targeters, the interest rate effect of higher public debt is non-linear and depends both on the ratio of foreign currency to local currency debt, and on the ratio of hard currency debt to GDP.

Charles Wyplosz, 17 June 2019

Cinzia Alcidi, Daniel Gros, 23 May 2019

The relationship between high public debt and low interest rates is once again at the forefront of debate. This column shows that countries with high debt levels pay a risk premium. This creates the potential for self-reinforcing loops of high debt and high risk premia, which can become explosive. 

Mitu Gulati, Ugo Panizza, Mark Weidemaier, Grace Willingham, 18 May 2019

One way for a government to reassure investors of its willingness to repay is to give them a priority claim to state assets. It remains to be seen, however, whether such commitments are viewed as credible by market participants. This column investigates how markets responded to two such commitments. A commitment by the government of Spain did not affect yield spreads, while one by the government of Puerto Rico did. This may be because, as a sub sovereign, Puerto Rico faced higher constraints on its ability to renege. 

Barry Eichengreen, Asmaa El-Ganainy, Rui Esteves, Kris Mitchener, 01 April 2019

The history of sovereign debt evolved over time along with the purposes for which governments borrowed: first state building, then public-good provision, and most recently social welfare and entitlements. Although many periods when debt-to-GDP ratios rose explosively culminated in funding crises, debasements and restructurings, less widely appreciated are episodes of successful debt consolidation achieved through rapid growth or budgetary discipline. This column analyses the economic and political circumstances that made these debt consolidation episodes possible.

Samba Mbaye, Marialuz Moreno Badia, Kyungla Chae, 12 January 2019

Since the financial crisis researchers have extensively explored the dangers of excessive public debt, but excessive private debt has received less attention. This column documents a common form of indirect private sector bailout that goes largely unnoticed. Whenever households and firms are caught in a debt overhang and need to deleverage, governments come to the rescue through a countercyclical rise in public debt. This indirect substitution takes place even in the absence of a crisis.

Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, Ricardo Reis, 16 October 2017

The outgoing German finance minister, Wolfgang Schäuble, has recently expressed concerns about the risks posed to the world economy by high levels of debt. This column presents the latest Centre for Macroeconomics and CEPR survey of leading economists, in which a strong majority of respondents agree that an excess of public and private debt together with inflated asset prices mean that the world economy faces heightened risks. A similarly strong majority of the experts also agree that the loose monetary policy of major central banks is responsible for the recent increase in global leverage and asset values.

Mirko Licchetta, Michal Stelmach, 14 April 2017

Population ageing is one of the most commonly cited drivers of rising healthcare spending. However, other non-demographic cost pressures, such as increasing relative health spending and technological advancement, also contribute substantially over the longer term. This column argues that taking these additional factors into account, the UK’s net public debt due to healthcare is projected to be up to twice as large in 2066. These findings stress the importance of balancing the budget as early as possible to keep public finances on a sustainable path.

Yi Huang, Marco Pagano, Ugo Panizza, 03 November 2016

High levels of public debt are correlated with lower economic growth across countries, but questions remain about whether this relationship is causal. Using Chinese data, this column explores whether increasing public debt crowds out private investment. City-level investment ratios are found to be negatively correlated with local government debt for private manufacturing firms, but not for state-owned or foreign-owned manufacturers. This suggests that as well as the short-term benefits of fiscal stimulus, there might also be negative longer-term effects, such as the crowding out of more efficient firms. 

Charles Wyplosz, 01 August 2016

The German Council of Economic Advisors recently proposed a mechanism for the orderly restructuring of sovereign debt in the Eurozone. This column argues that the proposal suffers from some inherent weaknesses. The proposal builds on logical errors and embeds well-established ideas in a setup that suffers from serious limitations. It also neglects alternative strategies that favour targeting large debts as soon as possible.

Alex Pienkowski, Joyce Saito, Suchanan Tambunlertchai, 28 March 2016

Initiatives to reduce public debt in low-income countries have made substantial progress over the past decade, but challenges remain and continue to evolve. This column presents the findings from a new IMF-World Bank report on these developments. Low-income countries have benefited from debt relief and favourable economic conditions, resulting in generally lower debt burdens and vulnerabilities. There has also been a shift in debt financing, with greater reliance on emerging market economies, international capital markets, and domestic sources. However, more recently, risks have begun to re-emerge necessitating fiscal prudence and improved debt management.

Richard Baldwin, Francesco Giavazzi, 07 September 2015

The EZ Crisis is a long way from finished. The latest VoxEU eBook presents a consensus view of what caused the Crisis and why. It argues that this was a classic ‘sudden stop’ crisis – not a public-debt crisis. Excessive, cross-border lending and borrowing among EZ members in the pre-Crisis years – much of which ended up in non-traded sectors – was why Greece’s deficit deceit in 2009 could trigger such a massive crisis. The ultimate causes were policy failures that allowed the imbalances to get so large, a lack of institutions to absorb shocks at the EZ level, and poor crisis management.

Alex Pienkowski, Pablo Anaya, 06 August 2015

During the Global Crisis, sovereign debt-to-GDP ratios grew substantially in the face of shocks to growth, increased fiscal deficits, bank recapitalisation costs, and rising borrowing costs. This column looks at how these various shocks interact with each other to exacerbate or mitigate the eventual impact on debt. Choice of monetary policy regime is an important determinant of how public debt reacts to these shocks.



CEPR Policy Research