Public Debt and r - g at Risk

By Weicheng Lian, Andrea F Presbitero, Ursula Wiriadinata

July 24, 2020

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Format: Chicago

Weicheng Lian, Andrea F Presbitero, and Ursula Wiriadinata. Public Debt and r - g at Risk, (USA: International Monetary Fund, 2020) accessed December 3, 2024

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.

Subject: Currencies, External debt, Financial services, Foreign currency debt, Long term interest rates, Money, Public debt

Keywords: Currencies, Debt country, Fiscal policy, Foreign currency debt, FX share group, Global, Interest rate-growth differential, Interest rate-growth differential, Interest rates environment, Interest-rate response, Long term interest rates, Public debt, Public debt-to-GDP, Shocks, U.S. dollar, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/137
Stock No:

WPIEA2020137
ISBN:

9781513550794
ISSN:

1018-5941

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