Debt Is Not Free

IMF Working Papers, January 3, 2020

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Title: "Debt Is Not Free"
By Marialuz Moreno Badia, Paulo A Medas, Pranav Gupta, Yuan Xiang
Date: January 3, 2020
Abstract-level finding: With public debt soaring across the world, a growing concern is whether current debt levels are a harbinger of fiscal crises, thereby restricting the policy space in a downturn. The empirical evidence to date is however inconclusive, and the true cost of debt may be overstated if interest rates remain low.
Research approach: Re-examines the importance of public debt as a leading indicator of fiscal crises using machine learning techniques to account for complex interactions previously ignored in the literature.

Public debt is the most important predictor of crises, showing strong non-linearities.
Beyond certain debt levels, the likelihood of crises increases sharply regardless of the interest-growth differential.
Interactions of public debt with inflation and external imbalances can be as important as debt levels.
Results do not necessarily imply causality but indicate that governments should be wary of high public debt even when borrowing costs seem low.

Uses machine learning techniques to account for complex interactions previously ignored in the literature.
Focus is on public debt as a leading indicator of fiscal crises and on how interactions with macroeconomic variables affect crisis probability.

High public debt warrants caution even if borrowing costs are low.
Policymakers should account for non-linear risks associated with debt levels.
Interactions between public debt, inflation, and external imbalances should factor into fiscal risk assessments and policy design.