Sovereign Debt Composition in Advanced Economies: A Historical Perspective
IMF Working Papers, September 9, 2014
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Bibliographic details
- Authors: Laura Blattner, Mark De Broeck, Asmaa A ElGanainy, Malin Hu
- Published: September 9, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498358781.001
Key findings
- Study period and coverage:
- Analysis covers 1900-2011.
- Sample covers thirteen advanced economies.
- Debt accumulation episodes:
- Episodes of large debt accumulation—essentially, large increases in debt supply—were typically absorbed by increases in short-term, foreign currency-denominated, and banking-system-held debt.
- The above pattern did not hold during the debt build-ups starting in the 1980s and 1990s, which were compositionally skewed toward long-term local-currency debt.
- Debt consolidation episodes:
- Evidence supports the financial repression-cum-inflation channel for post World War II debt reductions.
- The scope for repeating the postwar strategy appears limited unless:
- financial liberalization and globalization were materially rolled back, or
- the current globally agreed monetary policy regime built around price stability were abandoned.
- Significant favorable structural demand shifts, as witnessed in the 1980s and 1990s, are not deemed likely.
Interpretation and drivers
- Change in debt composition after the 1980s and 1990s attributed to:
- higher structural demand for sovereign paper,
- capital account liberalization in advanced economies,
- emergence of a large contractual saving sector,
- innovative sovereign debt products.
- Data limitations:
- Notwithstanding data gaps, the authors recover broad common patterns across episodes.
Implications for sovereign debt management and policy
- Historical patterns imply that:
- Large supply shocks were historically absorbed via shorter maturities, foreign currency issuance, and banking-system holdings—patterns that may pose rollover and currency risks.
- The later shift toward long-term local-currency debt reduced rollover and currency vulnerability but depended on structural demand developments that may not recur.
- Policy-relevant constraints:
- Reliance on financial repression and inflation to reduce debt is constrained by prevailing financial liberalization and a monetary policy regime prioritizing price stability.
- Debt management strategies should account for structural demand conditions (contractual savings, capital account openness) and instrument innovation when planning issuance across currency, maturity, holder profile, and marketability dimensions.
Source: Sovereign Debt Composition in Advanced Economies: A Historical Perspective (IMF Working Paper), authors Laura Blattner, Mark De Broeck, Asmaa A ElGanainy, Malin Hu.