Debt Surges—Drivers, Consequences, and Policy Implications
IMF Working Papers, March 8, 2024
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- Debt Surges—Drivers, Consequences, and Policy Implications
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Bibliographic details
- Authors: Florian Schuster, Marwa Alnasaa, Lahcen Bounader, Il Jung, Jeta Menkulasi, Joana da Mota
- Published: March 8, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400268779.001
Overview
- Aim: place the current debt landscape in a historical context; investigate the drivers of debt surges; estimate the degree to which surges result in a crisis; examine post-surge debt trajectories and conditions under which debt follows a non-declining path.
- Context: many countries face elevated debt levels, increased debt vulnerabilities, tight financing conditions, and increased spending needs for development and transition to a greener economy.
Key Findings
- Fiscal policy and stock-flow adjustments play important roles in debt dynamics.
- Valuation effects arising from currency depreciation explain more than half of stock flow adjustments in LICs.
- Debt surges are estimated to result in a financial crisis with a probability of 11–20 percent.
- Spending-driven fiscal expansions during debt surges tend to result in a high probability of non-declining debt path.
Drivers of Debt Surges (as identified)
- Fiscal policy developments.
- Stock-flow adjustments, including valuation effects from currency depreciation.
- Increased spending needs for development and green transition.
- Tight financing conditions and elevated debt vulnerabilities.
Consequences and Trajectories
- Elevated likelihood of financial crises associated with debt surges (probability 11–20 percent).
- Post-surge debt trajectories can be non-declining, particularly when surges are driven by spending-led fiscal expansions.
- Currency depreciation can materially worsen stock-flow adjustments, notably in LICs where it explains more than half of those adjustments.
Policy Implications (inferred from findings)
- Monitor and manage fiscal policy during debt surge episodes to reduce the probability of a non-declining debt path.
- Address stock-flow adjustment risks, including mitigating exposure to currency depreciation, especially in LICs.
- Calibrate spending policies during surges to balance development and green transition needs against elevated debt vulnerabilities and tighter financing conditions.
Debt Surges—Drivers, Consequences, and Policy Implications, IMF Working Paper by Florian Schuster, Marwa Alnasaa, Lahcen Bounader, Il Jung, Jeta Menkulasi, Joana da Mota, March 8, 2024.
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