Public Debt and r - g at Risk
IMF Working Papers, July 24, 2020
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Bibliographic details
- Authors: Weicheng Lian, Andrea F Presbitero, Ursula Wiriadinata
- Published: July 24, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513550794.001
Key findings on r - g dynamics and public debt
- High public debts can lead to adverse future r - g dynamics.
- 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.
- (iii) a more right-skewed r - g distribution, implying higher down-side risks.
- High-debt countries experience larger increases in interest rates in response to:
- (iv) an unexpected decline in domestic output.
- (v) an increase of global volatility.
Sample and scope
- Analysis uses a large sample of advanced and emerging economies.
- Results are stronger when public debts are denominated in foreign currencies.
Thematic implications for fiscal policy and risk assessment
- The combination of elevated public debt and negative r - g episodes does not guarantee persistent low financing costs; high debt can increase the likelihood and scale of adverse r - g reversals.
- Currency denomination of public debt matters: foreign-currency debt amplifies the sensitivity of interest rates to domestic output shocks and global volatility.
- Fiscal expansion decisions should account for:
- higher average r - g and greater downside tail risk in high-debt settings,
- the elevated interest-rate response to domestic and global shocks, especially with foreign-currency debt exposure.
Weicheng Lian, Andrea F Presbitero, Ursula Wiriadinata. July 24, 2020.
Content in this bundle
- 3.1 Public Debt, Negativer-gSpells, and Reversals