Public Debt and r - g at Risk

Author/Editor:

Weicheng Lian ; Andrea F Presbitero ; Ursula Wiriadinata

Publication Date:

July 24, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

As interest rate-growth differentials (r-g) turned negative in many countries, governments consider pursuing fiscal expansion and the potential risks involved. Using a large sample of advanced and emerging economies, our analysis suggests that high public debts can lead to adverse future r-g dynamics. Specifically, countries with higher initial public debt experience (i) a shorter duration of negative r-g episodes and a higher probability of reversal, (ii) higher average r-g, and (iii) a more right-skewed r-g distribution, that implies higher down-side risks. Furthermore, high-debt countries experience larger increases in interest rates in response to (iv) an unexpected decline in domestic output and (v) an increase of global volatility. Results are stronger when public debts are denominated in foreign currencies.

Series:

Working Paper No. 20/137

Subject:

Frequency:

regular

English

Publication Date:

July 24, 2020

ISBN/ISSN:

9781513550794/1018-5941

Stock No:

WPIEA2020137

Format:

Paper

Pages:

42

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