That Squeezing Feeling: The Interest Burden and Public Debt Stabilization

May 22, 2013

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Xavier Debrun, and Tidiane Kinda. That Squeezing Feeling: The Interest Burden and Public Debt Stabilization, (USA: International Monetary Fund, 2013) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper explores the extent to which the pressure of debt service on other spending items may push governments to embark on fiscal consolidation beyond what is strictly necessary to secure solvency. The empirical analysis identifies thresholds of interest bill indicators beyond which governments appear to shift to policies aimed at durably curbing the debt trajectory. Hence, in the current context of high inherited public debts, countries experiencing rising borrowing costs and interest payments would be more likely to enact more aggressive fiscal consolidations than warranted by strict solvency concerns. Conversely, those benefiting from persistently low interest rates despite rising debt stocks would likely opt for a more gradual fiscal consolidation path than what solvency considerations would normally dictate.

Subject: Debt service, External debt, Fiscal policy, Fiscal stance, Interest payments, Public debt

Keywords: Debt ratio, Debt service, Debt stock, Fiscal consolidation, Fiscal stance, Global, Interest, Interest bill, Interest payment, Interest payment threshold, Interest payments, Interest payments ratio, Interest-payment ratio, Interest-payment squeeze, Interest-payment threshold, Payments ratio, Public debt, Public goods, Substitution effect, Utility function, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/125
Stock No:

WPIEA2013125
ISBN:

9781484321737
ISSN:

1018-5941

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