## Box 2. Definition and Interpretation of the Stock-Flow Adjustment

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### Definition and components of the Stock-Flow Adjustment (SFA)
- The SFA captures statistical discrepancies between the actual change in the debt ratio and the sum of:
  - the cumulative primary budget balance, and
  - the cumulative product of lagged debt ratio and the differential between effective interest rate on debt (i_t) and nominal GDP growth rate (γ_t) (as in equation (1) referenced in the source).
- Factors that can contribute to the SFA:
  - valuation effects on foreign currency debt;
  - timing effects (deficits measured on an accrual basis while debt is a cash concept);
  - below-the-line operations such as assumption of debts of non-governmental entities, debt restructuring or default, privatization, and bank recapitalization costs;
  - other forms of financial sector support that increase debt but not the deficit;
  - drawdown and buildup of government deposits;
  - transactions in financial assets;
  - measurement and statistical errors.
- Treatment of financial sector support under current conventions:
  - If financed from cash reserves, support measures do not increase gross debt.
  - If support implies a clear loss for the government, it is classified as a capital transfer and affects the budget balance (examples: acquisition of financial assets above market price; capital injections to cover bank losses).
  - If the government receives shares in a bank or debt securities of equal value to a capital injection, the operation is classified as a financial operation that affects gross debt but not the budget deficit.
  - Reclassification of entities from the financial sector to general government (e.g., nationalization of banks) increases government debt but not the deficit.

### Interpretation of the SFA sign and episode context
- Interpretation depends on:
  - the sign of the SFA (positive/negative), and
  - whether the decomposition is for a debt accumulation episode or a debt consolidation episode.
- Rules of thumb:
  - In a debt accumulation episode:
    - a positive SFA increases debt;
    - a negative SFA reduces debt.
  - In a debt consolidation episode:
    - a negative SFA means debt fell by less than the growth-interest differential and primary surplus would imply;
    - a positive SFA in a consolidation episode would imply the observed decline in debt would have been larger if the SFA had contributed positively.
- Large SFAs:
  - Large SFAs are common during debt surges but also occur in consolidation episodes; they reflect country-specific factors including domestic institutions (budget transparency), politics (elections), and economic cycles (recessions).
  - The scale of discrepancies is influenced by the extent of fiscal transparency in the budget process.

### Empirical and historical evidence (selected examples and statistics)
- Wartime financing and monetary effects (selected 19th-century and early 20th-century episodes):
  - United Kingdom, Napoleonic period:
    - price level rose by 90 percent between 1791 and 1813, then was pushed down to within 10 percent of prewar levels in 1821.
    - William Pitt the Younger introduced the country’s first income tax in 1799, which contributed fully 20 percent of total tax revenues by 1815.
    - Bank of England holdings of government securities rose from £10 million in 1797 to £15 million in 1809.
  - United States, Civil War:
    - bonds held by banks and low-denomination notes in public hands rose from $65 million to more than $2 billion between 1861 and 1865.
    - greenbacks accounted for 15 percent of wartime government spending.
    - associated price level rise was about 75 percent; price normalization and restoration of gold convertibility took until 1878–1879.
- Pre-1914 large debt reductions (selected outcomes):
  - United Kingdom: debt-GDP ratio fell from 194 percent in 1822 to 28 percent nine decades later.
  - France: public-debt-GDP ratio fell from 96 percent in 1896 to 51 percent in 1913.
  - United States: federal (union) government debt reduced to virtually zero by World War I.
- Advanced economies long-term and episode averages:
  - Debt-to-GDP ratios in advanced economies averaged 63 percent over the 115-year period covered.
  - By 1914 advanced-country debt had fallen to 23 percent of GDP (115-year low).
  - World War I, the Great Depression and World War II drove debt up to about 140 percent of GDP in 1946 (the highest level in the 11 decades).
  - By 1960 advanced-country debt had fallen to about 50 percent of GDP.
- Debt composition and cross-country contrasts:
  - Domestic-currency-denominated medium-to-long-term (MLT) debt comprised, on average, close to three-quarters of total advanced-country debt.
  - The share of foreign-currency-denominated debt in G-20 advanced economies was low on average, roughly 5 percent of the total.
  - G-20 emerging economies: public debts averaged 37 percent of GDP (versus 63 percent in advanced economies).
  - Domestic MLT debt share in G-20 emerging economies was 40 percent versus 76 percent in G-20 advanced economies (1980-2012 period).
  - Foreign-currency share in G-20 emerging economies averaged 46 percent of the total in the 1980-2012 period (peaked at about 80 percent in the mid-1990s and has been declining since).
  - Low-income countries (LICs) public debt averaged 38 percent of GDP between 1926 and 2015 but rose as high as 147 percent in the 1990s.
- Debt relief under HIPC and MDRI:
  - Of the 39 countries potentially eligible for HIPC Initiative assistance, 36 received the full amount of debt-relief for which they were eligible through HIPC and the MDRI.
  - As of end-August 2016, the total amount of debt relief under the HIPC and MDRI reached $126.6 billion, with the Democratic Republic of Congo being the largest recipient of debt relief ($16.3 billion).

### Decompositions of major debt buildup and reduction episodes (selected quantitative results)
- Debt buildup decompositions (advanced economies, cumulative over episode years):
  - Great Depression (1928-33): contribution to debt increase — Primary balance: -9; Interest-growth differential: 108; Stock-flow adjustment: 1.
  - Great Recession (2007-13): contribution to debt increase — Primary balance: 67; Interest-growth differential: 25; Stock-flow adjustment: 8.
- Debt reduction decompositions (advanced economies, cumulative over episode years):
  - Post-WWI (1921-29): contribution to reduction — Primary balance: 64; Growth-interest differential: 53; Stock-flow adjustment: -16.
  - Post-WWII (1945-75): contribution to reduction — Primary balance: 46; Growth-interest differential: 75; Stock-flow adjustment: -21.
- Select shifts in debt composition (post-WWII examples):
  - UK (1946-80):
    - debt reduction relative to initial debt level 85 (percentage points of GDP);
    - No. of years 35;
    - Average debt reduction per year 6 (percentage points of GDP);
    - Average inflation 7 (percent);
    - Change in MLT domestic debt share 21 (percent);
    - Change in central bank holdings 6 (percent).
  - Japan (1946-64):
    - debt reduction relative to initial debt level 98;
    - No. of years 19;
    - Average debt reduction per year 11;
    - Average inflation 42 (percent);
    - Change in MLT domestic debt share -33 (percent);
    - Change in central bank holdings 40 (percent).

### Policy-relevant observations and implications
- SFA interpretability and diagnostics:
  - SFA reflects a mix of valuation, timing, off-balance-sheet and measurement factors; reading its sign requires attention to whether the episode is one of accumulation or consolidation.
  - Large positive SFAs during accumulation episodes often reflect financial sector support and loans recorded outside spending measures; large negative SFAs during consolidation episodes can signal that debt fell by less than implied by primary surpluses and growth-interest differentials.
- Mechanisms for debt reduction differ in costs and feasibility:
  - Orthodox approach: relies on growth, primary surpluses, and privatization — supports long debt duration and non-resident holdings.
  - Heterodox approaches: include restructuring, inflation, wealth taxation, and financial repression — tend to discourage foreign and long-duration holdings and can have persistent adverse side effects.
- Financial repression and inflation:
  - Financial repression was more effective post-World War II due to tight financial regulation, capital controls, and limited investment opportunities.
  - Today, higher non-resident holdings and a more diversified investor base make financial repression harder to implement and riskier for financial stability.
  - Surprise inflation as a debt-reduction tool is politically and economically costly and can raise future borrowing costs and volatility, as illustrated by Japan’s rapid postwar inflation-driven reduction coupled with maturity shortening.
- Political economy and institutional influences:
  - Long-run success in servicing and reducing debt historically depended on political alignment with creditor interests, institutional arrangements (budgetary control), and episodes of favorable luck (absence of further wars or crises).

*Source: wp1906 - Box 2. Definition and Interpretation of the Stock-Flow Adjustment (content excerpt).*

### References .............................................................................................................

### References

### Boxes
- Box 1. Egypt’s Debt History in the 19th Century .................................................................... 13

### Location
- References ............................................................................................................................... 51

*wp1906 - References (page 51).*

### Box 2. Definition and Interpretation of the Stock-Flow Adjustment ..................................... 20

### Box 2. Definition and Interpretation of the Stock-Flow Adjustment

### I. INTRODUCTION
- Sovereign debt is described as "Janus-faced": it relaxes domestic savings constraints, smooths consumption, and finances investment in good times; it is associated with debt overhangs, banking collapses, exchange-rate crises and inflationary explosions in bad times.
- Historical analysis is used to:
  - Increase sample size for rare events like sovereign default.
  - Enrich understanding of features of sovereign debt associated with crisis resolution (structure of contracts, enforceability, costs of default).
  - Illuminate how sovereign debt has been used to build states, provide public goods, and underpin financial systems.
- Paper structure:
  - First half (Sections 2-4): two millennia of debt history to recover origins of sovereign borrowing.
  - Second half (Sections 5-7): focus on the most recent century with direct implications for contemporary policy makers.

### II. PUBLIC DEBT AS STATE BUILDING
- Two criteria to identify early sovereign borrowing:
  - Institutional prerequisites: durable towns/cities/states, contract laws recognizing polities as able to borrow, ledgers/accounting systems.
  - Market constraints: immediate demand for credit exceeding tax revenues and sufficient number of private lenders with wealth.
- Historical timeline and features:
  - Written records point to public borrowing up to two thousand years ago, but standardized sovereign debt contracts emerge regularly around 1000-1400 A.D.
  - Late Medieval loans (e.g., Edward III) were short-term with high interest rates; long-term sovereign borrowing becomes common after 1500.
  - City-states in 13th–14th centuries could borrow at longer maturities due to compact, merchant-dominated polities with representative institutions.
- Papal finances in the 1260s:
  - Tuscan bankers anticipated Church income and enabled banking firms to incorporate as joint stock companies with transferable shares to finance advances to the Church.
- Emergence of annuities and perpetuities:
  - Debt contracts in Italian city-states took the form of annuities ("rentes", "renten") that provided lifetime or perpetual interest streams with principal typically not repaid.
  - Perpetuities were liquid and bore lower yields than lifetime annuities; example yields cited: in the 1330s Barcelona perpetual annuities at 7.2 percent and "two-lives" annuities at 14.3 percent.
  - Perpetuities circumvented usury doctrine because principal repayment was not required.
- Marketability and collateral role:
  - Negotiability transformed these securities into a public financial good; sovereign debt became safe, liquid, and eligible as collateral.
  - By the end of the early modern period (16th–18th centuries), sovereign debt had become the dominant form of collateral for short-term credit in Europe.
  - Government annuities expanded collateral space, lowering required returns and reducing private sector short-term loan rates.
  - Politically independent city-states issuing long-term tradable debt could do so at around 5 per cent (Pezzolo 2014).
- State formation and fiscal capacity:
  - From the 16th century onward, sovereign debt supply was largely driven by war finance and border defense needs, as feudal obligations declined and armies for hire became prevalent.
  - Centralization and limits on rulers increased fiscal capacity and credibility, enabling lower yields (references to Dincecco, Alesina and Spolaore).
- Dutch and English financial models:
  - Dutch provinces scaled up negotiable sovereign debt and marketed securities internationally.
  - Dutch model was hampered by fiscal fractionalization; England developed a broader tax base and more efficient tax collection, tripling its tax take from the late Stuarts to the war of American independence (Brewer 1989).
- Bank of England and debt-for-equity:
  - In 1694, the Bank of England was chartered in exchange for a £1.2 million loan; it became banker to the government and public debt office.
  - The Bank–state relationship enabled England to fund at low rates, issuing 3 percent annuities while building a large debt stock.

### III. FROM WAR FINANCE TO PUBLIC GOODS
- Evolution of sovereign borrowing:
  - As states centralized and fiscal machinery improved, sovereign borrowing shifted toward financing public goods (education, public works, water, sewers, railroads, ports, canals).
  - Domestic public debt led this shift before foreign borrowing became prevalent for infrastructure.
- Global capital markets and foreign investment:
  - Foreign assets rose from 7 percent of world GDP in 1870 to 20 percent in the first decade of the 20th century (Obstfeld and Taylor 2004).
  - Table 1 (1880-1914) shows geographic distribution of new external debt issues and debt stocks across regions and periods.
- Selected historical debt statistics and episodes:
  - The United Nations report estimated total stock of debt in 1914 in excess of $40 billion US, $13.5 billion of which was foreign debt.
  - Table 1 entries (percentages and totals, each column sums to 100):
    - Foreign debt flows by region (1880-1889 / 1890-1899 / 1900-1913 / 1913-14):
      - Europe: 36.8 / 48.5 / 37.4 / 47.3
      - North America: 7.9 / 10.6 / 9.3 / 2.4
      - Latin America: 47.8 / 12.3 / 21.3 / 9.2
      - Africa: 0.4 / 7.8 / 7.4 / 2.6
      - Asia: 7.5 / 28.6 / 25.9 / 26.1
      - Oceania: 5.7 / 7.1 / 6.7 / 5.3
    - Debt stocks (1913-14 columns):
      - Foreign (1913-14): 48.9 / 2.3 / 9.8 / (Africa blank) / 24.9 / (Oceania blank)
      - Total (USD m): 957.6 / 1284.5 / 4398.6 / 12729.1 / 13453.1 / 40171.8
      - # sovereigns: 26 / 26 / 28 / 28 / 45 / 45
- Uses of sovereign borrowing and defaults:
  - Not all borrowing funded productive investment; substantial shares financed consumption and war.
  - Japan floated government bonds in London at 9 percent and 7 percent in 1870 and 1873 respectively to support Meiji modernization; later issued bonds at 4 percent with 55 years maturity for Russo-Japanese war financing (Tomita 2005).
  - Qing China issued sterling-denominated bonds at 8 percent (1875), 6 percent (1885), and 4.5 percent (1898, issued at 90 percent of face and secured by customs receipts); domestic bonds in 1894 and 1898 financed the First Sino-Japanese War and indemnity payments, later lapsed into default when the Qing stepped down in 1912 (Ho and Li 2010).
  - Emerging economies often could not manage growing debt stocks despite nominally funding public goods; Box 1 (not reproduced here) describes Egypt’s loss of financial autonomy and political sovereignty following fiscal expansion.

*Source: wp1906 - Box 2. Definition and Interpretation of the Stock-Flow Adjustment (content excerpt).*

### Box 1. Egypt’s Debt History in the 19

### Box 1. Egypt’s Debt History in the 19th Century

### Overview and chronology
- Egypt acquired substantial autonomy under Muhammed Ali (ruled from 1805). In 1841 the Porte granted Ali and his successors the title of governor of Egypt (known as Khedive) in exchange for an annual tribute; the settlement did not clearly exclude the privilege of issuing state loans.
- Khedive Said (1854-63) issued short-term loans and obtained a personal loan from the Comptoir d’Escompte in Paris to fund the construction of the Suez Canal.
- The era of modern state finance began in 1862 with the flotation of a £2.2 million external loan in London.
- By 1876:
  - funded debt had risen to £69 million;
  - floating debt had risen to £26 million.
- Khedive Ismail (assumed power in 1863) borrowed extensively for infrastructure and cultural projects rather than consolidating debt.
- Declining cotton prices, the 1873 financial crisis, and the 1875 Ottoman default closed markets to Egyptian loans.
- Ismail ceded customs duties, tobacco-monopoly revenues and provincial taxes to representatives of foreign creditors organized as the Caisse de la Dette Publique; the Caisse consolidated most of the external debt into a new 7 percent loan.
- The coupon on the consolidated loan was reduced three years later to 4 percent.
- Britain bombarded Alexandria and occupied Egypt in 1882 and took charge of government finances.
- Under British administration:
  - public revenues increased by 50 percent between 1882 and 1904;
  - between 1882 and 1913, outstanding foreign debt fell from ten times government revenues to half that value.
- Despite improvements in certain metrics, Egypt had one of the weakest fiscal capacities on the eve of World War I among peers under international financial control.

### Mechanisms of foreign financial control and instruments used
- Caisse de la Dette Publique:
  - received assigned revenues directly from the source;
  - possessed veto power over new borrowing or changes to taxation;
  - consolidated external debt and administered revenues and expenditures (dual control with controllers-general for revenues and for audit and debt).
- British intervention:
  - issued a new loan in 1885 under the guarantee of Britain and five other European governments.
  - used increased flexibility (as French creditors reduced control) to convert old debt into new loans paying half the previous rate.
- Other fiscal measures by the Khedive to cover liabilities included pledging revenues of personal estates (Dairas), pre-collection of taxes (in exchange for a 50 percent discount), and selling 45 percent of Suez Canal shares to the British government.

### Quantitative indicators and market structure (selected figures)
- 1862 flotation: £2.2 million external loan.
- 1876 debt stocks: funded debt £69 million; floating debt £26 million.
- Caisse consolidation: new loan with coupon 7 percent, later reduced to 4 percent (three years after issuance).
- Public revenue change: +50 percent between 1882 and 1904.
- Outstanding foreign debt relative to government revenues: fell from ten times to half between 1882 and 1913.
- Table of foreign borrowing by period (source: Tunçer (2015)):
  - Period 1862-1876: Foreign loans 69; Effective interest rate 8.5; Debt per capita (nominal value in £m) 7.2
  - Period 1876-1913: Foreign loans 55; Effective interest rate 4.5; Debt per capita (nominal value in £m) 7.5

### Sovereign default incidence and patterns (19th century context)
- Default prevalence and incidence highlights:
  - The unconditional probability of default rose above 5 percent per annum during the first Latin American debt crisis in the 1820s; by the end of that decade close to a third of all independent nations had defaulted on their external debts.
  - After the 1873 crisis the likelihood of new defaults rose to 2.5 percent per annum.
  - The Baring crisis in 1890 pushed the default rate above 4 percent per annum.
- Duration of defaults:
  - average duration fell from 14 years prior to 1870, to 8 years in the 1870s and 1880s, and to 2 years thereafter.
- Conditional probability of default by prior default history:
  - about 1.5 percent per annum for countries with up to one default prior;
  - 2.2 percent per annum after two prior defaults;
  - 4.7 percent per annum after three prior defaults.
- Market and institutional features affecting default and resolution:
  - bondholders’ committees, reputable underwriters, and in some cases direct intervention by creditor-country governments helped resolve defaults faster later in the century.
  - “Supersanctions” (fiscal house arrest via foreign administrators or use of gunboats) were sometimes applied, lowering ex-ante default probability by more than 60 percent and reducing risk premiums by roughly 200 basis points for supersanctioned countries.

### Causes and constraints identified
- Principal causes of default and fiscal distress: macroeconomic imbalances, political instability, and war.
- Policy and administrative constraints:
  - the Caisse’s control created stability but discouraged comprehensive fiscal reform (for example, redirecting revenues from land tax to indirect taxation and customs).
  - Egypt’s fiscal revenues grew the least among peers under international financial control, partly because the Caisse, earning ample revenues under the status quo, did little to encourage fiscal reforms.
- Market structure evolution:
  - international financial centers (London, Paris, Hamburg, Berlin, Brussels, Amsterdam, Zurich) dominated overseas lending; England, France, Germany, Belgium, the Netherlands, and Switzerland accounted for 87 percent of overseas lending in the 1870-1913 period.
  - by 1883 foreign government bonds accounted for 23 percent of securities quoted on the London Stock Exchange and 21 percent in 1913.
  - underwriters and specialized market makers were key to underwriting, issuance, and secondary market liquidity; underwriter reputation was negatively correlated with sovereign spreads through the end of the 19th century.

### Debt consolidation framing and analytic approach
- Debt consolidation before 1913 is discussed in the broader chapter with focus on episodes (Great Britain after the Napoleonic Wars, the United States in the late 19th century, and France before 1913) that reduced high public debts without restructuring, renegotiation, or overt financial repression.
- The chapter follows a debt decomposition based on Abbas et al. (2011, 2014a):
  - Equation (1) decomposes the total change in the debt-to-GDP ratio (푑_T − 푑_0) into:
    - the cumulative primary budget balance (푝_t),
    - the cumulative product of lagged debt ratio and the differential between effective interest rate on debt (푖_t) and nominal GDP growth rate (훾_t),
    - a cumulative stock-flow adjustment term (푠푓푎_t).
  - The residual stock-flow adjustment term captures operations detailed in Box 2 of the source text.
- Note: the decomposition understates the indirect contribution of economic growth to debt reduction to the extent that growth eases political constraints on improving the primary fiscal balance.

*Source: Box 1. Egypt’s Debt History in the 19th Century (from the supplied IMF content).*

### Box 2. Definition and Interpretation of the Stock-Flow Adjustment

### Box 2. Definition and Interpretation of the Stock-Flow Adjustment

### Definition and components of the Stock-Flow Adjustment (SFA)
- The SFA captures statistical discrepancies between the actual change in the debt ratio and the sum of:
  - the primary budget balance, and
  - the growth-interest differential (as in equation 1).
- Factors that can contribute to the SFA:
  - valuation effects on foreign currency debt;
  - timing effects (deficits measured on an accrual basis while debt is a cash concept);
  - below-the-line operations such as assumption of debts of non-governmental entities, debt restructuring or default, privatization, and bank recapitalization costs;
  - other forms of financial sector support that increase debt but not the deficit;
  - drawdown and buildup of government deposits;
  - transactions in financial assets;
  - measurement and statistical errors.
- Treatment of financial sector support under current conventions:
  - If financed from cash reserves, support measures do not increase gross debt.
  - If support implies a clear loss for the government, it is classified as a capital transfer and affects the budget balance (examples: acquisition of financial assets above market price; capital injections to cover bank losses).
  - If the government receives shares in a bank or debt securities of equal value to a capital injection, the operation is classified as a financial operation that affects gross debt but not the budget deficit.
  - Reclassification of entities from the financial sector to general government (e.g., nationalization of banks) increases government debt but not the deficit.

### Interpretation of the SFA sign and episode context
- Interpretation depends on:
  - the sign of the SFA (positive/negative), and
  - whether the decomposition is for a debt accumulation episode or a debt consolidation episode.
- In a debt accumulation episode:
  - a positive SFA increases debt;
  - a negative SFA reduces debt.
- In a debt consolidation episode:
  - a negative SFA means debt fell by less than the growth-interest differential and primary surplus would imply;
  - a positive SFA in a consolidation episode would imply the observed decline in debt would have been larger if the SFA had contributed positively.
- Large SFAs are common during debt surges but also occur in consolidation episodes; they reflect country-specific factors including:
  - domestic institutions (budget transparency),
  - politics (elections),
  - economic cycles (recessions).
- The scale of discrepancies is influenced by the extent of fiscal transparency in the budget process.

### Empirical examples and historical context (selected findings)
- 19th-century wartime financing (Napoleonic Wars, Franco-Prussian War, U.S. Civil War):
  - seigniorage accounted for a relatively small fraction of war finance;
  - the majority of war expenditure was financed by taxation and public debt issuance.
- United Kingdom, Napoleonic period:
  - price level rose by 90 percent between 1791 and 1813, then was pushed down to within 10 percent of prewar levels in 1821 when convertibility was restored;
  - William Pitt the Younger introduced the country’s first income tax in 1799, which contributed fully 20 percent of total tax revenues by 1815;
  - Bank of England holdings of government securities rose from £10 million in 1797 to £15 million in 1809.
- United States, Civil War:
  - bonds held by banks and low-denomination notes in public hands rose from $65 million to more than $2 billion between 1861 and 1865;
  - greenbacks accounted for 15 percent of wartime government spending;
  - associated price level rise was about 75 percent; price normalization and restoration of gold convertibility took until 1878–1879.
- Pre-1914 large debt reductions (selected outcomes):
  - United Kingdom: debt-GDP ratio fell from 194 percent in 1822 to 28 percent nine decades later;
  - France: public-debt-GDP ratio fell from 96 percent in 1896 to 51 percent in 1913;
  - United States: federal (union) government debt reduced to virtually zero by World War I.
- Role of SFA in historical consolidations:
  - In the three large pre-1914 consolidations (UK, US, France), none undertook involuntary restructurings; only Britain’s SFA was responsible for a nonnegligible share of debt reduction, with a 15 percent share due to the 1888 conversion of Consols from 3 to 2.5 percent bonds.
- Advanced economies long-term averages and episodes:
  - Debt-to-GDP ratios in advanced economies averaged 63 percent over the 115-year period covered;
  - by 1914 advanced-country debt had fallen to 23 percent of GDP (115-year low);
  - World War I, the Great Depression and World War II drove debt up to about 140 percent of GDP in 1946 (the highest level in the 11 decades);
  - by 1960 advanced-country debt had fallen to about 50 percent of GDP.
- Debt composition in advanced economies:
  - domestic-currency-denominated medium-to-long-term (MLT) debt comprised, on average, close to three-quarters of total advanced-country debt;
  - the share of foreign-currency-denominated debt in G-20 advanced economies was low on average, roughly 5 percent of the total.
- Emerging market and low-income country statistics:
  - G-20 emerging economies: public debts averaged 37 percent of GDP (versus 63 percent in advanced economies);
  - domestic MLT debt share in G-20 emerging economies was 40 percent versus 76 percent in G-20 advanced economies (1980-2012 period);
  - foreign-currency share in G-20 emerging economies averaged 46 percent of the total in the 1980-2012 period (peaked at about 80 percent in the mid-1990s and has been declining since);
  - low-income countries (LICs) public debt averaged 38 percent of GDP between 1926 and 2015 but rose as high as 147 percent in the 1990s.
- Debt relief under HIPC and MDRI:
  - Of the 39 countries potentially eligible for HIPC Initiative assistance, 36 received the full amount of debt-relief for which they were eligible through HIPC and the MDRI;
  - as of end-August 2016, the total amount of debt relief under the HIPC and MDRI reached $126.6 billion, with the Democratic Republic of Congo being the largest recipient of debt relief ($16.3 billion).

### Decompositions of major debt buildup and reduction episodes (selected quantitative results)
- Debt buildup decompositions (advanced economies, cumulative over episode years):
  - Great Depression (1928-33): contribution to debt increase — Primary balance: -9; Interest-growth differential: 108; Stock-flow adjustment: 1.
  - Great Recession (2007-13): contribution to debt increase — Primary balance: 67; Interest-growth differential: 25; Stock-flow adjustment: 8.
- Debt reduction decompositions (advanced economies, cumulative over episode years):
  - Post-WWI (1921-29): contribution to reduction — Primary balance: 64; Growth-interest differential: 53; Stock-flow adjustment: -16.
  - Post-WWII (1945-75): contribution to reduction — Primary balance: 46; Growth-interest differential: 75; Stock-flow adjustment: -21.
- Select shifts in debt composition (post-WWII examples):
  - UK (1946-80): debt reduction relative to initial debt level 85 (percentage points of GDP); No. of years 35; Average debt reduction per year 6 (percentage points of GDP); Average inflation 7 (percent); Change in MLT domestic debt share 21 (percent); Change in central bank holdings 6 (percent).
  - Japan (1946-64): debt reduction relative to initial debt level 98; No. of years 19; Average debt reduction per year 11; Average inflation 42 (percent); Change in MLT domestic debt share -33 (percent); Change in central bank holdings 40 (percent).

### Key analytical observations and implications for policy
- SFA interpretability:
  - SFA reflects a mix of valuation, timing, off-balance-sheet and measurement factors; reading its sign requires attention to whether the episode is one of accumulation or consolidation.
- Cross-episode contrasts:
  - The Great Depression saw larger output losses but a smaller increase in the debt-to-GDP ratio compared with the Great Recession, due to differences in policy responses and initial debt levels.
  - In the Great Recession, the SFA played a larger role in debt increases because of extensive financial sector support and loans recorded outside spending measures.
- Mechanisms for debt reduction differ:
  - Orthodox approach: relies on growth, primary surpluses, and privatization — supports long debt duration and non-resident holdings.
  - Heterodox approaches: include restructuring, inflation, wealth taxation, and financial repression — tend to discourage foreign and long-duration holdings and can have persistent adverse side effects.
- Effectiveness and risks of financial repression today:
  - Financial repression was more effective post-World War II due to tight financial regulation, capital controls, and limited investment opportunities.
  - Today, higher non-resident holdings and a more diversified investor base make financial repression harder to implement and riskier for financial stability.
  - Surprise inflation as a debt-reduction tool is politically and economically costly and can raise future borrowing costs and volatility, as illustrated by Japan’s rapid postwar inflation-driven reduction coupled with maturity shortening.
- Political economy and institutional influences:
  - Long-run success in servicing and reducing debt historically depended on political alignment with creditor interests, institutional arrangements (budgetary control), and episodes of favorable luck (absence of further wars or crises).

*Source: Box 2. Definition and Interpretation of the Stock-Flow Adjustment, wp1906*

### REFERENCES

### REFERENCES

### Historical analyses of public debt, sovereign finance, and debt relief
- Abbas, S. M. A., N. Belhocine, A. El-Ganainy, and M. Horton 2011. “Historical Patterns and Dynamics of Public Debt—Evidence from a New Database,” IMF Economic Review, Vol. 59, No. 4, pp. 717-742.  
- Abbas, S.M.A., N. Belhocine, A. El-Ganainy, and A. Weber 2014a. “Current Crisis in Historical Perspective,” in C. Cottarelli, P. Gerson, and A. Senhadji, editors, Post-Crisis Fiscal Policy, pp. 161-191 (Cambridge, MA: MIT Press).  
- Abbas, S. M. A., L. Blattner, M. De Broeck, A. El-Ganainy and M. Hu 2014b. “Sovereign Debt Composition in Advanced Economies: A Historical Perspective,” IMF Working Paper, No. 14/162 (September).  
- Bulow, J. and K. Rogoff 1989. “Sovereign Debt: Is to Forgive to Forget?" American Economic Review 79, pp.43-50.  
- Daseking, C. and R. Powell 1999. “From Toronto Terms to the HIPC Initiative: A Brief History of Debt Relief for Low-Income Countries,” IMF Working Paper, No. 99/142.  
- Drelichman, M. and H.-J. Voth 2014. Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II, Princeton: Princeton University Press.  
- Easterly, W. 2002. “How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief,” World Development 30, pp. 1677-1696.  
- Gautam, M. 2003. "Debt Relief for the Poorest: An OED Review of the HIPC Initiative," Washington, D.C.: World Bank Publications.  
- Guinnane, T. 2004. “Financial Vergangenheitsbewaeltigung: The 1953 London Debt Agreement,” Economic Growth Center Discussion Paper 880, Department of Economics, Yale University.  
- Lindert, P.H., Morton, P.J., 1989. “How sovereign debt worked” In: Sachs, J. (ed.), Developing Country Debt and Economic Performance, Chicago: University of Chicago Press, Chicago, pp. 39-106.  
- Reinhart, C. and B. Sbrancia 2015. “The Liquidation of Government Debt,” IMF Working Paper No. 15/7 (January).   
- Reinhart, C. and C. Trebesch 2014. “A Distant Mirror of Debt, Default, and Relief,” NBER Working Paper No. 20577 (October).  
- Tunçer, C. 2015. Sovereign Debt and International Financial Control. The Middle East and the Balkans, 1870-1914, Houndmills: Palgrave Macmillan.  
- United Nations 1946. Public Debt 1914-1946, New York: United Nations.

### Financial crises, contagion, and credit cycles
- Ba, H. 2017. “The Systemic Causes of Financial Crises in the Long Nineteenth Century,” Business and Politics, pp.1-17.  
- Bordo, M. and J. Haubrich 2010. "Credit Crises, Money and Contractions: An Historical View," Journal of Monetary Economics 57, pp.1-18.  
- Bordo,  M.  and  A.  Murshid  2001.  “Are  Financial  Crises  Becoming  Increasingly  More Contagious? What is the Historical Evidence on Contagion?” in S. Claessens and K. Forbes, editors, International Financial Contagion, pp.367-403 (Boston: Kluwer Academic).  
- Fishlow, A. 1985. “Lessons from the Past: Capital Markets During the 19th Century and the Interwar Period,” International Organization 39, pp.38-93.  
- Feldstein, M. 2002. “Economic and Financial Crises in Emerging Market Economies: Overview of Prevention and Management,” NBER Working Paper No. 8837 (March).  
- Meyer,  R.  1970. Bankers’ Diplomacy: Monetary  Stabilization  in  the  Twenties,  New  York: Columbia University Press.  
- Mitchener,  K.  and  M.  Weidenmier  2008. "The  Baring  Crisis  and  the  Great  Latin  American Meltdown of the 1890s," Journal of Economic History 68, pp.462-500.  
- Neal, L. and M. Weidenmier 2003. “Crises in the Global Economy from Tulips to Today: Contagion and Consequences” in M. Bordo, A. Taylor and J. Williamson (eds.), Globalization in Historical Perspective, Chicago: University of Chicago Press.  
- Neal, L. 1990. The Rise of Financial Capitalism. International Capital Markets in the Age of Reason, Cambridge: Cambridge University Press.  
- Reinhart, C., Reinhart, V. and C. Trebesch 2016. “Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015,” NBER Working Paper No. 21958.  
- Romer, C. 1992. “What Ended the Great Depression?” Journal of Economic History 52, pp. 757-784.  
- Scheffers,  S.  and  R.  Roberts  2014. The  Media  and  Financial  Crises:  Comparative  and Historical Perspectives, London: Routledge.  
- Suter, C. 1990. Schuldenzyklen in der Dritten Welt: Kreditaufnahme, Zahlungskrisen und Schulden-regelungen peripherer Länder im Weltsystem von 1820 bis 1986, Frankfurt/ Main: A. Hain.  
- Twomey, M. 1983. “The 1930s Depression in Latin America: A Macro Analysis,” Explorations in Economic History 20, pp.221-247.  
- World Bank 2005. “Lessons and Controversies from Financial Crises in the 1990s,” Country Notes for Chapter 7: Financial Liberalization: What Went Right, What Went Wrong?” in Economic Growth in the 1990s: Learning from a Decade of Reform, Washington, D.C.: World Bank.

### State capacity, taxation, fiscal policy, and war finance
- Acemoglu, D. 2005. "Politics and Economics in Weak and Strong States," Journal of Monetary Economics, 52(7): 1199-1226.  
- Alesina, A. and E. Spolaore 2003. The Size of Nations, Cambridge, Mass.: MIT Press.  
- Barro, R. 1987. “Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701-1918”, Journal of Monetary Economics 20(2), pp. 221-47.  
- Besley, T. and T. Persson 2009. “The Origins of State Capacity: Property Rights, Taxation and Ppolitics,” American Economic Review 99 (4). pp. 1218-12445.  
- Brewer, J. 1989. The Sinews of Power. War, Money and the English State, 1688-1783, London: Unwin Hyman.  
- Dincecco, M. 2009. “Fiscal Centralization, Limited Government, and Public Revenues in Europe, 1650-1913,” Journal of Economic History 69, pp.48-103.  
- ----- 2010.  “Fragmented  Authority  from  Ancien  Régime  to  Modernity:  A  Quantitative Analysis,” Journal of Institutional Economics 6, pp.305-328.  
- ----- 2011. From  Warfare  to  Wealth:  The  Military  Origins  of  Urban  Prosperity  in  Europe, Cambridge: Cambridge University Press.  
- ----- 2015. “The Rise of Effective States in Europe.” Journal of Economic History 75, pp. 901-918.  
- Dyson,  K.  2014. States, Debt and Power: ‘Saints’ and ‘Sinners in European History and Integration, New York: Oxford University Press.  
- Grossman, H. and T. Han 1993. “A Theory of War Finance,” Defence Economics 4, pp.33-44  
- North, D. and B. Weingast 1989. “Constitutions and Commitment: Evolution of the Institutions Governing Public Choice in Seventeenth-Century England”, Journal of Economic History 49, pp.803-832.  
- Pollack, S. 2014. “The First National Income Tax, 1861-1872,” Tax Lawyer 67, pp.1-20.  
- Reinhart, C. and K. Rogoff 2009. This Time is Different. Eight Centuries of Financial Folly, Princeton: Princeton University Press.  
- Reinhart, C. and K. Rogoff 2011. “The Forgotten History of Domestic Debt,” The Economic Journal, Vol. 121, No. 52, pp. 319-350.  
- Reinhart, C. and C. Trebesch 2014. “A Distant Mirror of Debt, Default, and Relief,” NBER Working Paper No. 20577 (October).  
- Tomz, M. and M. L. J. Wright 2013. “Empirical Research on Sovereign Debt and Default.” Annual Review of Economics 5, pp. 247-272.  
- Yared, P. 2018. “Rising Government Debt and What to Do About It,” NBER Working Paper No. 24979 (August).  
- Yun-Casalilla, B. and P. O’Brien, eds. 2015. The Rise of Fiscal States. A Global History 1500-1914, Cambridge: Cambridge University Press.

### International capital markets, bonds, underwriters, and bondholder protection
- Accominotti, O., M. Flandreau, R. Rezzik and F. Zumer 2010. “Black Man's Burden, White Man's Welfare: Control, Devolution and Development in the British Empire, 1880‐1914,” European Review of Economic History 14(1): 47-70.  
- Bayoumi, T. and M. Bordo 1998. “Getting Pegged: Comparing the 1879 and 1925 Gold Resumptioiins,” Oxford Economic Papers 50(1), pp.122-149.  
- Bordo, M., C. Meissner and A. Redish 2003. “How Original Sin was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions, 1800-2000,” NBER Working Paper No. 9841 (July).  
- Cohen-Setton, J., J. Hausman and J. Wieland 2017. “Supply-Side Policies in the Great Depression: Evidence from France,” Journal of Money, Credit and Banking 49, pp.273-318.  
- Edelstein, M. 1982. Overseas Investment in the Age of High Imperialism: The United Kingdom, 1850-1914, New York: Columbia University Press.  
- Flandreau, M. 2013. “Sovereign States, Bondholders Committees, and the London Stock Exchange in the Nineteenth Century (1827–68): New Facts and Old Fictions,” Oxford Review of Economic Policy 29, pp.668–96.  
- Flandreau,  M.,  J.  Flores,  N.  Gaillard  and  S.  Nieto-Parra  2010.  "The  End  of  Gatekeeping: Underwriters and the  Quality of Sovereign  Bond  Markets, 1815-2007," NBER International Seminar on Macroeconomics 2009, pp. 53-92.  
- Flandreau, M. and N. Sussman 2005. “Old Sins: Exchange Clauses and European Foreign Lending in the 19th Century,” in B. Eichengreen, B. and R. Hausmann (eds.), Other People's Money. Debt Denomination and Financial Instability in Emerging Markets Economies, Chicago: University of Chicago Press, pp.154-189.  
- Flores, J. 2011. “Information Asymmetries and Conflict of Interest during the Baring Crisis, 1880-1890,” Financial History Review 18, pp.191-215.  
- Michie,  R.  1987. The  London  and  New  York  Stock  Exchanges  1850-1914,  London:  Unwin Hyman Ltd.  
- ----- 1999. The London Stock Exchange: A History, Oxford: Oxford University Press.  
- ----- 2006. The Global Securities Market. A History, Oxford: Oxford University Press.  
- Munro, J. 2013. "Rentes and the European' Financial Revolution'", in G. Caprio ed., Handbook of Key Global Financial Markets, Institutions, and Infrastructure, vol. I, Oxford: Elsevier, pp. 235–249.  
- Neal, L. 2015. A  Concise  History  of  International  Finance:  From  Babylon  to  Bernanke, Cambridge: Cambridge University Press.  
- Platt, D. C. M. 1968. Finance, Trade, and Politics in British Foreign Policy 1815-1914, Oxford: Oxford University Press.  
- Roberds, W. and F. Velde. 2014. “Early Public Banks” FRB of Chicago Working Paper No. 2014-03.

### Regional and period studies; national case studies
- Belforti, F. 1843. Storia della Città di Perugia, Perugia: Vincenzo Santucci.  
- Bent, P. and R. Esteves 2016. “Capital Pull Factors at the Turn of the 20th Century: A Sectoral Analysis”, Mimeo.  
- Chambers, D. and R. Esteves 2014. "The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880-1913”, Explorations in Economic History 52, pp.1-21.  
- Daunton, M. 2001. Trusting Leviathan. The Politics of Taxation in Britain, 1799-1914, Cambridge: Cambridge University Press.  
- Davis, L. and R. Huttenback 1986. Mammon and the Pursuit of Empire. The Political Economy of British Imperialism, 1860-1912, Cambridge: Cambridge University Press.  
- De Luca, G. 2008. “Government Debt and Financial Markets: Exploring Pro-Cyclical Effects in Northern Italy during the Sixteenth and the Seventeenth Centuries,” in F. Caselli, ed., Government Debts and Financial Markets in Europe, London: Picketing and Chatto, pp. 45-66.  
- De Vries, J. and A. van der Woude 1997. The First Modern Economy: Success, Failure, and Perseverance of the Dutch Economy, 1500-1815, Cambridge: Cambridge University Press.  
- Diaz-Alejandro, C. 1984. “Latin America in the 1930s, in R. Thorpe (ed), Latin America in the 1930s, London: Macmillan.  
- Drelichman, M. and H.-J. Voth 2014. Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II, Princeton: Princeton University Press.  
- Feis,  H.  1930. Europe,  the  World's  Banker,  1870-1914.  An  Account  of  European  Foreign Investment and the Connection of World Finance with Diplomacy before the War, New Haven: Council on Foreign Relations.  
- Ho, C.-Y. and D. Li 2010. “A Mirror of History: Chinese Bond Market from 1921 to 1942,” unpublished manuscript, Georgia Institute of Technology and Fudan University (July).  
- Hozier,  H.  ed  1872. The  Franco-Prussian  War:  Its  Causes,  Incidents  and  Consequences, London: William Mackenzie.  
- Lipson, C. 1985. Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries, Berkeley: University of California Press.  
- MacDonald, J. 2003. A Free Nation Deep in Debt: The Financial Roots of Democracy, New York: Farrar, Straus and Giroux.  
- Tomita, T. 2005. “Japanese Government Bonds 100 Years Ago,” Nomura Research Institute Paper No.90 (June).  
- Tunçer, C. 2015. Sovereign Debt and International Financial Control. The Middle East and the Balkans, 1870-1914, Houndmills: Palgrave Macmillan.  
- Twomey, M. 1983. “The 1930s Depression in Latin America: A Macro Analysis,” Explorations in Economic History 20, pp.221-247.

### Data sources, statistical reconstructions, and methodology
- Andersson, F. and J. Lennard 2018. “Irish GDP between the Famine and the First World War: Estimates based on a Dynamic Factor Model,” European Review of Economic History forthcoming.  
- Broadberry, S., B. Campbell, A. Klein, B. van Leeuwen and M. Overton 2015. British Economic Growth 1270-1870, Cambridge: Cambridge University Press.  
- Campbell, T. 2004. “Sound Finance: Gladstone and British Government Finance, 1880-1895,” unpublished Ph.D. dissertation, London School of Economics.  
- Carter, S., S Gartner, M. Haines, A. Olmstead, R. Sutch and G. Wright eds. 2006. Historical Statistics of the United States: Earliest Times to the Present, NY: Cambridge University Press.  
- Maddison, A. 1995. Monitoring the World Economy 1820-1992, Paris: OECD Development Centre.  
- Mauro, P., N. Sussman and Y. Yafeh 2002. “Emerging Market Spreads: Then Versus Now," Quarterly Journal of Economics, 117: 695-733.  
- Munro, J. 2013. "Rentes and the European' Financial Revolution'", in G. Caprio ed., Handbook of Key Global Financial Markets, Institutions, and Infrastructure, vol. I, Oxford: Elsevier, pp. 235–249.  
- Weber, A. 2012. “Stock-Flow Adjustments and Fiscal Transparency: A Cross-Country Comparison,” IMF Working Paper, No. 12/49 (January).  
- De Broeck, M. and Guscina, A. 2011. “Government Debt Issuance in the Euro Area: The Impact of the Financial Crisis,” IMF Working Paper No. 11/21 (January).  
- Brooks, R., K. Ross, R. Powell, Y. Quemarez, D. Ross, M. Cortes, S. Rizavi, B. Ketchekmen and F. Fornasari 1998. “External Debt Histories of Ten Low-Income Developing Countries: Lessons from Their Experience,” IMF, Working Paper No. 98/72 (May).  
- Guscina, A. and Jeanne, O. 2006. “Government Debt in Emerging Market Countries: A New Data Set,” IMF Working Paper No. 06/98 (April).  
- European Central Bank 2015. “The Fiscal Impact of Financial Sector Support during the Crisis,” Economic Bulletin 6, pp. 74-87.  
- Maurer, H. and P. Grussenmeyer 2015. “Financial Assistance Measures in the Euro Area from 2008 to 2013: Statistical Framework and Fiscal Impact,” Statistics Paper Series No. 7, Frankfurt: European Central Bank.  
- International Monetary Fund (IMF) 2013. “Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies,” IMF Policy Paper, September 2013.

### Institutions, markets, and political economy of finance
- Eichengreen, B. 1982. “The Proximate Determinants of Domestic Investment in Victorian Britain,” Journal of Economic History 42, pp.87-95.  
- Eichengreen, B. 1996. “Institutions and Economic Growth: Europe since 1945,” in N. Crafts and G. Toniolo eds., Economic Growth in Europe since 1945, Cambridge: Cambridge University Press.  
- Eichengreen, B. and P. Garber 1991. “Before the Accord: U.S. Monetary-Financial Policy 1945-51,” in G. Hubbard ed., Financial Markets and Financial Crises, pp.175-206 (Chicago: University of Chicago Press).  
- Eichengreen, B. and U. Panizza 2016. “A Surplus of Ambition: Can Europe Rely on Large Primary Surpluses to Solve its Debt Problem?” Economic Policy 31, pp.5-49.  
- Eichengreen,  B.  and  R.  Portes  1986,  “Debt  and  Default  in  the  1930s:  Causes  and Consequences,” European Economic Review 30, pp.79-120.  
- Epstein, S. 2000. Freedom and Growth: The Rise of States and Markets in Europe, 1300-1750, London: Routledge.  
- Esteves,  R.  2013.  "The  Bondholder,  the  Sovereign  and  the  Banker:  Sovereign  Debt  and Bondholders' Protection before 1914,” European Review of Economic History 17, pp.389-407.  
- Esteves, R. and C. Tunçer 2016. "Feeling the Blues: Moral Hazard and Debt Dilution in Eurobonds Before 1914," Journal of International Money and Finance 65: 46-68.  
- Ferguson, N. 2006. “Political Risk and the International Bond Market Between the 1848 Revolution and The Outbreak of the First World War.” Economic History Review 59, pp. 70-112.  
- Lipson, C. 1985. Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries, Berkeley: University of California Press.  
- Platt, D. C. M. 1968. Finance, Trade, and Politics in British Foreign Policy 1815-1914, Oxford: Oxford University Press.  
- Stasavage, D. 2011 States of Credit: Size, Power, and the Development of European Polities, Princeton: Princeton University Press.  
- Tilly, C. 1992. Coercion, Capital, and European States AD 990-1992, New York: Wiley-Blackwell.  
- Tracy, J. 1985. A Financial Revolution in the Habsburg Netherlands: ‘Renten’ and ‘Renteniers’ in the County of Holland, 1515-1565, Berkeley: University of California Press.

*References list as provided in wp1906 - REFERENCES*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wp1906.pdf_