Element contents
Debt Sustainability
A Global Perspective
Published online by Cambridge University Press: 31 August 2022
Summary
This study presents the facts, arguments and scenarios around public debt from a global perspective. Especially the largest economies feature record debt and fiscal risks, including from population ageing and financial imbalances. Given low interest rates, there is no imminent problem. But at some point, debt will have to come down. There are four possible scenarios how debt could come down. First, governments could economise and reform. Second, governments could default. Third, governments could erode the real value of debt via inflation and negative real interest rates. However, this scenario cannot continue forever. Policy errors can prompt a loss of confidence, destabilisation and crisis. This fourth scenario last included the largest economies in the 1970s. It would become a major global challenge if it were to happen again in today's interconnected world.
Keywords
- Type
- Element
- Information
- Online ISBN: 9781009218528Publisher: Cambridge University PressPrint publication: 15 September 2022
Bibliography
Abiad, A., Detragiache, E. and Tressel, T. (2010). A New Database of Financial Reforms. IMF Staff Papers, 57(2), 281–302.CrossRefGoogle Scholar
Acharya, V. V., Pedersen, L. H., Philippon, T. and Richardson, M. (2017). Measuring Systemic Risk. Review of Financial Studies, 30(1), 2−47.Google Scholar
Adalet McGowan, M., Andrews, D. and Millot, V. (2017). The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries. OECD Economics Department Working Papers, No. 1372. Paris: OECD Publishing.Google Scholar
Afonso, A., Schuknecht, L. and Tanzi, V. (2005). Public Sector Efficiency: An International Comparison. Public Choice, 123, 321−47.Google Scholar
Afonso, A. and Schuknecht, L. (2019). How ‘Big’ Should Government Be? EconPol Working Paper 23/2019.Google Scholar
Aghion, P. and Mhammedi, A. (2021). The Keys to Inclusive Growth. Project Syndicate, 25 November. www.project-syndicate.org/commentary/inclusive-growth-competition-policy-and-flexicurity-by-philippe-aghion-and-aymann-mhammedi-2021-11.Google Scholar
Agnello, L. and Schuknecht, L. (2011). Booms and Busts in Housing Markets: Determinants and Implications. Journal of Housing Economics, 20(3), 171−90. https://doi.org/10.1016/j.jhe.2011.04.001.Google Scholar
Aizenman, J. and Marion, N. (2011). Using Inflation to Erode the US Public Debt. Journal of Macroeconomics, 33(4), 524−41.Google Scholar
Akgun, O., Bartolini, D. and Cournède, B. (2017). The Capacity of Governments to Raise Taxes. OECD Economics Department Working Papers 1407.Google Scholar
Alesina, A. and Ardagna, S. (2010). Large Changes in Fiscal Policy: Taxes versus Spending. Tax Policy and the Economy, 24, 235–68.Google Scholar
Alesina, A. and Ardagna, S. (2013). The Design of Fiscal Adjustments. Tax Policy and the Economy, 27, 19–68.Google Scholar
Alesina, A., Favero, C. and Giavazzi, F. (2019). Austerity: When It Works and When It Doesn’t. Princeton, NJ: Princeton University Press.Google Scholar
Arnold, T., Gulati, M. and Panizza, U. (2020). How to Restructure Euro Area Sovereign Debt in the Era of Covid−19. Capital Markets Law Journal, 15(3), 322–46.Google Scholar
Arslan, Y., Drehmann, M. and Hofmann, B. (2020). Central Bank Bond Purchases in Emerging Market Economies. Bank for International Settlements (BIS) Bulletin No. 20.Google Scholar
Banerjee, R. N. and Hofmann, B. (2020). Corporate Zombies: Anatomy and Life Cycle. BIS Working Paper 882.Google Scholar
Blanchard, O. (2019). Public Debt and Low Interest Rates. Peterson Institute of International Economics Working Paper 19-4.Google Scholar
Bordo, M. D. and Levy, M. D. (2021). Do Enlarged Fiscal Deficits Cause Inflation: The Historical Record. Economic Affairs, 41(1), 59–83.CrossRefGoogle Scholar
Borio, C. and Disyatat, P. (2011). Global Imbalances and the Financial Crisis: Link or No Link? BIS Working Paper 346.Google Scholar
Borio, C., Contreras, J. and Zampoli, F. (2020). Assessing the Fiscal Implications of Banking Crisis. BIS Working Paper 893.Google Scholar
Borio, C., Disyatat, P., Juselius, M. and Rungcharoenkitkul, P. (2017). Why So Low for So Long? A Long Term View of Real Interest Rates. BIS Working Paper 685.Google Scholar
Borio, C., Lombardi, M. and Zampoli, F. (2016). Fiscal Sustainability and the Financial Cycle. BIS Working Paper 552.Google Scholar
Brunnermeier, M. (2021). The Resilient Society. Princeton, NJ: Princeton University Press.Google Scholar
Çelik, S., Demirtaş, G. and Isaksson, M. (2019). Corporate Bond Markets in a Time of Unconventional Monetary Policy. OECD Capital Market Series, Paris.Google Scholar
Checherita-Westphal, C., Hallett, A. H. and Rother, P. (2014). Fiscal Sustainability Using Growth-Maximising Debt Targets. Applied Economics, 46(6), 638–47.Google Scholar
Codogno, L. and van den Noord, P. (2020). Going Fiscal? A Stylised Model With Fiscal Capacity and a Eurobond in the Eurozone. Amsterdam Centre for European Studies Research Paper No. 2020/03.Google Scholar
Codogno, L. and van den Noord, P. (2021). Assessing Next Generation EU. LEQS paper No.166/2020, February. www.lse.ac.uk/european-institute/Assets/Documents/LEQS-Discussion-Papers/LEQSPaper166.pdf.Google Scholar
De Larosière, J. (2019). Nous sommes entrés dans une ère ou la dette dirige nos économies. Les Echos, 22 June.Google Scholar
Detken, C. and Smets, F. (2004). Asset Price Booms and Monetary Policy. In Siebert, H. (ed.), Macroeconomic Policies in the World Economy. Berlin: Springer, pp. 189–232.Google Scholar
Bundesbank, Deutsche (2018). Finanzstabilitätsbericht [Financial Stability Report]. Frankfurt: Deutsche Bundesbank.Google Scholar
Bundesbank, Deutsche (2019). Finanzstabilitätsbericht [Financial Stability Report]. Frankfurt: Deutsche Bundesbank.Google Scholar
Bundesbank, Deutsche (2021). Government Finances: Central Bank Bond Purchases Increase the Sensitivity to Interest Rate Changes. Monthly Report, June.Google Scholar
Diessner, S. and Lisi, G. (2021). Masters of the ‘Masters of the Universe’? Monetary, Fiscal and Financial Dominance in the Eurozone. Socio-Economic Review, 18(2), 313–35.Google Scholar
Dow, C. (2013). Inside the Bank of England: Memoirs of Christopher Dow, Chief Economist 1973–84. Houndmills, Basingstoke: Palgrave Macmillan.Google Scholar
Eichengreen, B. (2016). The Global Monetary Order. In The Future of the International Monetary and Financial Architecture. Frankfurt: European Central Bank, pp. 21–63.Google Scholar
Eichengreen, B., Mehl, A. and Chiţu, L. (2017). How Global Currencies Work. Princeton, NJ: Princeton University Press.Google Scholar
Eichengreen, B., El-Ganainy, A., Esteves, R. and Mitchener, K. J. (2021). In Defense of Public Debt. Oxford: Oxford University Press.CrossRefGoogle Scholar
Eren, E., Schrimpf, A. and Sushko, V. (2020). US Dollar Funding Markets during the Covid-19 Crisis: The Money Market Fund Turmoil. Bank for International Settlements (BIS) Bulletin 14.Google Scholar
Erhard, L. (1957/2009). Wohlstand für Alle. Köln: Anaconda. Published in English as Prosperity for All. New York: Frederik Plaeger.Google Scholar
Eschenbach, F. and Schuknecht, L. (2004). Budgetary Risks from Real Estate and Stock Markets. Economic Policy, 19(39), 313–46. https://doi.org/10.1111/j.1468-0327.2004.00125.x.Google Scholar
Espitia, A., Mattoo, A., Rocha, N., Ruta, M. and Winkler, D. (2021). Pandemic Trade: COVID-19, Remote Work and Global Value Chains. World Economy. https://doi.org/10.1111/twec.13117.Google Scholar
European Banking Authority (2016). Annual Report. Luxembourg: Publications Office of the European Union.Google Scholar
European Central Bank (ECB) (2010). The ‘Great Inflation’: Lessons for Monetary Policy. European Central Bank Monthly Bulletin, May.Google Scholar
Commission, European (2018). Ageing Report: Economic and Budgetary Projections. European Commission Institutional Paper 079, Brussels.Google Scholar
Commission, European (2020). The 2021 Ageing Report: Underlying Assumptions and Projection Methodologies. Institutional Paper 142, Brussels.Google Scholar
Commission, European (2021). Debt Sustainability Monitor 2020. Institutional Paper 143, Brussels.Google Scholar
Federal Reserve Bank of New York (2021). Center for Microeconomic Data. www.newyorkfed.org/microeconomics/sce/labor#/expectations-job-search16.Google Scholar
Feld, L., Jungen, P. and Schuknecht, L. (2021). Why the Social Market Economy Succeeds. Project Syndicate Long Reads, March.Google Scholar
Feldstein, M. (2013). An Interview with Paul Volcker. Journal of Economic Perspectives, 27(4), 105–20.Google Scholar
Fuest, C. and Gros, D. (2019). Government Debt in Times of Low Interest Rates: The Case of Europe. EconPol Europe Policy Brief 16/2019.Google Scholar
G20 (2020). Common Framework for Debt Treatments beyond the DSSI. Saudi Arabia: G20 Finance Ministers and Central Bank Governors Meeting.Google Scholar
Goodhart, C. and Pradhan, M. (2020). The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival. London: Palgrave Macmillan.CrossRefGoogle Scholar
Gründler, K. and Potrafke, N. (2020). Fiscal Rules: Historical, Modern, and Sub-national Growth Effects. CESifo Working Paper 8305.Google Scholar
Hank, R. (2012). Die Pleiterepublik: Wie der Schuldenstaat uns entmündigt und wie wir uns befreien können [The Bankrupt Republic]. Munich: Blessing Verlag.Google Scholar
Hartmann, P. and Smets, F. (2018). The European Central Bank’s Monetary Policy during Its First 20 Years. Brookings Papers on Economic Activity, 2018(2), 1–146.Google Scholar
Hauptmeier, S., Heipertz, M. and Schuknecht, L. (2007). Expenditure Reform in Industrialised Countries: A Case-Study Approach. Fiscal Studies, 28(3), 293–343.Google Scholar
Hauptmeier, S., Sanchez-Fuentes, A. J. and Schuknecht, L. (2011). Towards Expenditure Rules and Fiscal Sanity in the Euro Area. Journal of Policy Modelling, 33(4), 597–617.CrossRefGoogle Scholar
Havlik, A., Heinemann, F., Helbig, S. and Nover, J. (2021). Dispelling the Shadow of Fiscal Dominance? Fiscal and Monetary Announcement Effects for Euro Area Sovereign Spreads in the Corona Pandemic. ZEW Discussion Papers No. 21-050.Google Scholar
Heinemann, F. (2021). The Political Economy of Euro Area Sovereign Debt Restructuring. Constitutional Political Economy, 32, 502–22.Google Scholar
Heinemann, F., Moessinger, M. D. and Yeter, M. (2018). Do Fiscal Rules Constrain Fiscal Policy? A Meta-Regression-Analysis. European Journal of Political Economy, 51, 69–92.Google Scholar
Hilscher, J., Raviv, A. and Reis, R. (2014). Inflating Away the Public Debt? An Empirical Assessment. NBER Working Paper 20339.Google Scholar
Hofmann, B., Shim, I. and Shin, H. S. (2020). Emerging Market Economy Exchange Rates and Local Currency Bond Markets amid the Covid-19 Pandemic. BIS Bulletin No. 5.Google Scholar
Homer, S. and Sylla, R. E. (1991). A History of Interest Rates. New Brunswick, NJ: Rutgers University Press.Google Scholar
Institute of International Finance (IIF) (2021b). Supply Chain Disruptions Continue to Build. Global Macro Views, 10 June.Google Scholar
Institute of International Finance (IIF) (2021c). The US Yield Conundrum. Global Macro Views, 17 June.Google Scholar
International Monetary Fund (IMF) (2018). Global Financial Stability Report (GFSR). Washington, DC.Google Scholar
International Monetary Fund (IMF) (2020a). Global Financial Stability Report (GFSR), October. Washington, DC.Google Scholar
International Monetary Fund (IMF) (2020b). The International Architecture for Resolving Sovereign Debt Involving Private-Sector Creditors – Recent Developments, Challenges, And Reform Options. Policy Paper No. 2020/043.Google Scholar
International Monetary Fund (IMF) (2021c). Global Financial Stability Report (GFSR), April. Washington, DC.Google Scholar
International Monetary Fund (IMF) (2021d). Global Financial Stability Report (GFSR), October. Washington, DC.Google Scholar
International Monetary Fund (IMF) (2021e). Review of the Debt Sustainability Framework for Market Access Countries. Policy Paper No. 2021/003.Google Scholar
International Monetary Fund (IMF) (2021f). World Economic Outlook (WEO), April. Washington, DC.Google Scholar
International Monetary Fund (IMF) (2021g). World Economic Outlook (WEO), October. Washington, DC.Google Scholar
Jaeger, A. and Schuknecht, L. (2007). Boom-Bust Phases in Asset Prices and Fiscal Policy. Journal of Emerging Markets Finance and Trade, 43(6), 45–66.Google Scholar
Jonung, L., Kiander, J. and Vartia, P. (eds.) (2009). The Great Financial Crisis in Finland and Sweden: The Nordic Experience of Financial Liberalization. Cheltenham, UK: Edward Elgar.Google Scholar
Jonung, L., Schuknecht, L. and Tujula, M. (2009). The Boom–Bust Cycle in Finland and Sweden 1984–95 in an International Perspective. In Jonung, L., Kiander, J. and Var, P. (eds.), The Crisis of the 1990s in Finland and Sweden: The Nordic Experience of Financial Liberalization. Cheltenham, UK: Edward Elgar.Google Scholar
Kelton, S. (2020). The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. New York: Public Affairs.Google Scholar
Klöckers, H. and Mehl, A. (2021). The International Role of the Euro. European Central Bank, OMFIF Webinar.Google Scholar
König, N. and Schuknecht, L. (2019). The Role of Government and Trust in the Market Economy. CESifo Working Papers 6997. In Heusel, W. and Rageade, J. P. (eds.), The Authority of EU Law – Do We Still Believe in It? New York: Springer.Google Scholar
Krause, M. U. and Moyen, S. (2016). Public Debt and Changing Inflation Targets. American Economic Journal: Macroeconomics, 8(4), 142–76.Google Scholar
Krugman, P. (2020). Interview in L. Jacobson, Here Is Why Top Economists Are Not Worried about the National Debt, CNBC.Google Scholar
Laeven, L. A. and Valencia, F. V. (2008) Systemic Banking Crises: A New Database. IMF Working Paper 08/224: 1–78.Google Scholar
Lee, K. Y. (1998). Asia in Crisis: Risk and Chances. Speech to the Dusseldorf Industry Club, 8 October. www.nas.gov.sg/archivesonline/data/pdfdoc/1998100803.htm.Google Scholar
MacKenzie, J. (2013). In Visit with Pope, Angela Merkel Urges Strong Financial Regulation. Christian Science Monitor, 18 May. www.csmonitor.com/World/Latest-News-Wires/2013/0518/In-visit-with-Pope-Angela-Merkel-urges-strong-financial-regulation.Google Scholar
Mayer, T. and Schnabl, G. (2021). How to Escape from the Debt Trap: Lessons from the Past. Flossback von Storch Research Institute.Google Scholar
Mitchener, K. J. and Trebesch, C. (2021). Sovereign Debt in the 21st Century: Looking Backward, Looking Forward. National Bureau of Economic Research Working Paper No. 28598.Google Scholar
Norimasa, Y., Ueda, K. and Watanabe, T. (2021). Emerging Economies’ Vulnerability to Changes in Capital Flows: The Role of Global and Local Factors. Bank of Japan 21-E-5.Google Scholar
North, D. C. and Weingast, B. R. (1989). Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. The Journal of Economic History, 49(4), 803-32. https://doi.org/10.1017/S0022050700009451.Google Scholar
OECD (2015). Results of the OECD-CoR Consultation of Subnational Governments. Paris: OECD Publishing.Google Scholar
OECD (2019a). Budgeting and Public Expenditures in OECD Countries 2019. Paris: OECD Publishing.Google Scholar
OECD (2020b). Shocks, Risks and Global Value Chains: Insights from the OECD METRO Model. Paris: OECD Publishing. Trade and Agriculture Policy Brief. https://issuu.com/oecd.publishing/docs/metro-gvc-final.Google Scholar
OECD (2021a). Assessing the Economic Impacts of Environmental Policies. Paris: OECD Publishing.Google Scholar
Official Monetary and Financial Institutions Forum (OMFIF) (2021). Global Public Investor 2021. www.omfif.org/wp-content/uploads/2021/07/GPI-2021.pdf.Google Scholar
Rajan, R. and Zingales, L. (2003/2018). Saving Capitalism from the Capitalists. India: HarperCollins.Google Scholar
Reinhart, C. and Rogoff, K. (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.Google Scholar
Reinhart, C. M. and Rogoff, K. S. (2010). Growth in a Time of Debt. The American Economic Review, 100(2), 573–78. https://doi.org/10.1257/aer.100.2.573.Google Scholar
Reinhart, C. M. and Sbrancia, M. B. (2015). The Liquidation of Government Debt. Economic Policy, 30(82), 291–333.Google Scholar
Roos, J. E. (2019). Why Not Default? The Political Economy of Sovereign Debt. Princeton, NJ: Princeton University Press.Google Scholar
Ruiz Rivadeneira, A. M. and Schuknecht, L. (2019). Ensuring Effective Governance of Public Private Partnerships, Journal of Infrastructure Policy and Development, 3(2). https://doi.org/10.24294/jipd.v3i2.1148.Google Scholar
Schrimpf, A., Shin, H. S. and Sushko, V. (2020). Leverage and Margin Spirals in Fixed Income Markets during the Covid-19 Crisis. BIS Bulletin No. 2.Google Scholar
Schuknecht, L. (2018). The Supply of Safe Assets and Fiscal Policy. Intereconomics, 53(2), 94–100.Google Scholar
Schuknecht, L. (2020a). Preparing for the Recovery: More Market, Better Government. London: Politeia.Google Scholar
Schuknecht, L. (2020b). Public Spending and the Role of the State. Cambridge: Cambridge University Press.Google Scholar
Schuknecht, L., Moutot, P., Rother, P. and Stark, J. (2011). The Stability and Growth Pact: Crisis and Reform. European Central Bank Occasional Paper 129.Google Scholar
Schuknecht, L. and Tanzi, V. (2005). Reforming Public Spending: Great Gain, Little Pain. London: Politeia.Google Scholar
Schuknecht, L. and Zemanek, H. (2020). Public Expenditures and the Risk of Social Dominance. Public Choice, 188(1–2), 95–120. https://doi.org/10.1007/s11127-020-00814-5.Google Scholar
Schwartz, G., Fouad, M., Hansen, T. and Verdier, G. (2020). Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment. Washington, DC: International Monetary Fund.Google Scholar
Stark, J. (2021). Jetzt haben wir sie bald – die Schulden- und Haftungsunion [It is coming, the debt and liability union]. Welt, 15 March 2021.Google Scholar
Summers, L. (2021). Opinion: The Biden Stimulus Is Admirably Ambitious. But It Brings Some Big Risks, Too. The Washington Post, 4 February 2021.Google Scholar
Tanzi, V. (2016). Pleasant Dreams or Nightmares in the Public Debts Scenarios? International Scientific Symposium and Official Ceremony to mark Hans-Werner Sinn’s Retirement and the 25th Anniversary of the Center for Economic Studies (CES), University of Munich, 22 January 2016. www.cesifo.org/DocDL/sd-2016-09-tanzi-abschied-sinn-2016-05-12.pdf.Google Scholar
Tanzi, V. (2018). The Irresistible Attraction of Public Debt. In Wagner, R. (2020) James M. Buchanan: A Theorist of Political Economy and Social Philosophy. London: Macmillan, ch. 43.Google Scholar
Tanzi, V. and Schuknecht, L. (2000). Public Spending in the 20th Century: A Global Perspective. Cambridge: Cambridge University Press.Google Scholar
Vissing Jorgensen, A. (2020). The Treasury Market in Spring 2020 and the Response of the Federal Reserve. Manuscript, University of California, Berkeley.Google Scholar
Volcker, P. A., and Harper, C. (2018). Keeping At It: The Quest for Sound Money and Good Government. New York: Public Affairs.Google Scholar
Wissenschaftlicher Beirat beim BMWi (2020). Öffentliche Investitionen in Deutschland: Probleme und Reformbedarf [Public investment in Germany: problems and reform needs]. Berlin: BMWi.Google Scholar
Wong, C. (2021). Plus ça change: Three Decades of Fiscal Policy and Central-Local Relations in China. Singapore: East Asian Institute.Google Scholar
Zettelmeyer, J., Trebesch, C. and Gulati, M. (2013). The Greek Debt Restructuring: An Autopsy. Economic Policy, 28(75), 513–63.Google Scholar
Zettelmeyer, J. (2020). Sovereign Debt Workouts: Developments, Challenges and Reform Options. Mimeo.Google Scholar
- 5
- Cited by