In recent years, the issue of ballooning national debt has surfaced in a variety of countries around the world, and the United States, of course, is no exception.
Recent research has produced a variety of theories and insights that apply to this issue, and much academic scholarship looks to draw lessons from economic history. Here are some relevant studies and working papers.
“A Decade of Debt”
National Bureau of Economic Research, 2011
Findings: There is substantial risk that the current high debt levels will lead to “financial repression,” resulting in more directed lending to government from pension funds, caps on interest rates, and stricter regulation of cross-border capital flows. As for claims that the U.S. economy may prove an exception to historic rules, the researchers find “no evidence” to suggest that “the consequences of higher debt levels for growth will be different for the U.S than for other advanced economies.”
“Growth in a Time of Debt”
National Bureau of Economic Research, 2010
Findings: “The relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies…[T]here is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.)”
“The Forgotten History of Domestic Debt”
National Bureau of Economic Research, 2008
Findings: “First, domestic debt is big — for the 64 countries for which we have long time series, domestic debt accounts for almost two-thirds of total public debt…. Second, the data go a long ways toward explaining the puzzle of why countries so often default on their external debts at seemingly low debt thresholds. Third, domestic debt has largely been ignored in the vast empirical work on inflation.”
“Supersanctions and Sovereign Debt Repayment”
Journal of International Money and Finance, 2010
Findings: “In contrast to recent history, extreme sanctions such as gunboat diplomacy and ‘fiscal house arrest’ were used to punish debt defaulters during the period 1870-1913. We find that, after a ‘supersanction’ was imposed, a country improved its fiscal discipline. As a result, ex ante default probabilities on new issues fell dramatically and the country spent no additional time in default. Our results suggest some type of external fiscal or monetary control may be effective in imposing discipline on serial debt defaulters.”
“Sovereign Defaults and Debt Restructurings: Historical Overview”
Chapter 1, from Debt Defaults and Lessons from a Decade of Crises, MIT Press, 2007
Findings: “All lending booms so far have ended in busts in which some of the beneficiaries of the preceding debt inflows defaulted or rescheduled their debts. Busts were usually triggered by at least one of the following factors: (1) a deterioration of the terms of trade of debtor countries; (2) a recession in the core countries that were the providers of capital; (3) a rise in international borrowing costs driven by events in creditor countries, such as tighter monetary policy; and (4) a crisis in a major debtor country, transmitted internationally through financial and trade linkages.”
Tags: economy, financial crisis, research roundup