One popular explanation for the increase in US household debt in the years before the subprime mortgage crisis is that households with stagnating incomes borrowed more to ‘keep up with the Joneses’. This column presents recent research that questions this explanation. Low-income households in high-inequality regions in fact borrowed relatively little compared to similar households in low-inequality regions. A theoretical model in which greater local income inequality facilitates the screening of loan applicants makes predictions that are consistent with the data.
Olivier Coibion, Yuriy Gorodnichenko, Marianna Kudlyak, John Mondragon, Wednesday, January 29, 2014
Hans Gersbach, Saturday, January 4, 2014
Democratic governments tend to accumulate excessive debt. This column proposes a new rule – the ‘Catenarian Fiscal Discipline’ – which allows a fiscally disciplined incumbent to limit the debt-making of the next officeholder. This way, fiscal discipline today can lead to fiscal discipline in the future. Such a rule would require that we broaden our notion of representative democracy by recognising the fact that a current government already has various implicit ways of limiting what its elected successors can do.
Markus Eberhardt, Andrea F Presbitero, Sunday, November 17, 2013
The idea that there is a common tipping point in the relationship between public debt and economic growth is still widespread. However, this is likely due to a misinterpretation of the existing evidence. Once we allow for the relationship between debt and growth to be country-specific, there is limited evidence supporting the presence of a within-countries debt threshold.
Angus Armstrong, Monique Ebell, Saturday, October 26, 2013
In the debate over Scottish independence, the question of how the UK’s assets and sovereign debt would be divided has received insufficient attention. This column argues that the size of Scotland’s debt obligations would be crucial to its optimal choice of currency. Under plausible assumptions, fiscal tightening would be required to return Scottish debt to sustainable levels, and a self-fulfilling rise in borrowing costs might tempt Scotland to leave the sterling currency union. A debt-for-oil swap might be mutually beneficial for a newly independent Scotland and the continuing UK.
Òscar Jordà, Moritz Schularick, Alan Taylor, Friday, October 18, 2013
In the aftermath of the global financial crisis, few would dispute the risks of excessive borrowing. But which debts should one worry about – public or private? This column presents new research on the interplay of public and private debts since 1870 in 17 advanced economies. History demonstrates that excessive private-sector borrowing plays a greater role than fiscal profligacy in generating financial instability. However, when the credit boom collapses, the government’s capacity to alleviate the downturn is limited by the prevailing level of public debt.
Susan Schadler, Tuesday, October 15, 2013
The IMF loans to Greece, Ireland and Portugal are considered controversial by some analysts. This column argues that these loans – granted without having agreed on convincing paths to manageable debt levels – constituted a substantial departure from IMF principles. The situation is costly for Europe and, having now permanently changed the principles guiding large IMF loans, it will be costly for crises to come. A serious rethink of the management and decision-making structure of the IMF is needed.
Edwin M. Truman, Tuesday, September 10, 2013
Should we expect more global financial crises? This column argues that we should. Global financial crises are far from being a thing of the past because they are often caused by buildups of excessive domestic and foreign debt. To successfully address them and to limit negative spillovers, we need coordinated actions that prevent a contraction in global liquidity. Unless we establish this more robust, coordinated global financial safety net centred on central banks (which is where the money is), we may end up being incapable of addressing inevitable future crises.
Luis AV Catão, Gian Maria Milesi-Ferretti, Wednesday, September 4, 2013
Debt seems to be a lightning rod for crises. This column presents new research showing that the ratio of net foreign liabilities to GDP, and in particular its net external debt component, is indeed a significant crisis predictor for both advanced economies and emerging markets. Large current-account deficits and real exchange rate appreciation – the standard predictors – still matter, but we should be thinking more about net external debt.
Roel Beetsma, Konstantinos Mavromatis, Friday, December 21, 2012
Are Eurobonds a desirable solution to Eurozone members’ debt crises? Unhappily, it’s difficult to say. This column argues it very much depends on how the system is designed. However, looking at the most prominent proposals, it seems a cleverly designed Eurobonds system may well provide governments with the right incentives to encourage both issuing less debt and pursuing meaningful structural reform.
Richard Wood, Wednesday, December 19, 2012
Five years after the subprime bubble burst, the self-correcting nature of business cycles is being questioned and, subsequently, orthodox macroeconomic policy is starting to be challenged. This column introduces a radical rethink of options open to macroeconomic policymakers, suggesting that in order to simultaneously achieve economic stimulus without increasing debt, new money creation should be used to directly finance on-going budget deficits.
Alberto Alesina, Friday, November 30, 2012
Should debt-ridden and economically struggling Western governments be doing everything possible to reduce their deficits? Should we cut spending or hike taxes to reduce our debt-to-GDP ratios? This column argues that the answer is obvious: the cheapest, most effective and confidence-inspiring route is to cut spending. Coupled with other pro-growth policies, the evidence suggests that it is only really spending cuts that will spur private investment and economic recovery in Europe.
Rabah Arezki, Markus Brückner, Friday, June 15, 2012
Booming commodity prices generate large foreign currency inflows for exporting nations. This column argues that in countries with executive constraints and political competition windfalls from commodity booms lead to a significant reduction in external debt. In autocratic regimes, on the other hand, the windfalls are used to increase consumption expenditures.
Carmen M Reinhart, Jacob Funk Kirkegaard, Monday, March 26, 2012
Rich nations worldwide have a problem with debt. In the past, such problems have been dealt with by several tactics, including 'financial repression'. This column explains how the tactic works and documents its resurgence in the wake of the global and Eurozone crises.
Gianluca Cafiso, Roberto Cellini, Tuesday, March 20, 2012
As fiscal-consolidation policies are being implemented across the EU, a debate has been developing concerning the effects of such policies on the dynamics of the debt-to-GDP ratio. This column examines past episodes and finds that following fiscal adjustment may have favourable effects in the short term but that the two-year cumulated changes have been mainly adverse.
Carmen M Reinhart, Monday, January 9, 2012
Financial crises often unfold according to common patterns, but the post-2007 contraction is in fact different from other post-WWII crises in its unusual severity, says Carmen Reinhart in CEPR DP8742. But the patterns of past crises may still provide clues on the future of housing, labour, and international financial markets. This paper outlines what that future might look like.
Raghuram Rajan, Viral Acharya, Thursday, November 24, 2011
Why do governments repay external borrowing? This column argues that myopic governments seeking popularity do not default when they are poor because they would lose access to debt markets and be forced to reduce spending. And they do not default when rich because of the adverse consequences to the domestic financial sector. This explains why governments continue servicing debt when default is beneficial for the country.
Charles Wyplosz, Friday, September 16, 2011
Europe’s debt crisis is unfolding while Japanese and US debt problems are on hold. The problem of public debt in advanced economies will be with us for decades. This column introduces a new Geneva Report on the World Economy that addresses the nuts, bolts, and worries surrounding the issue.
Barry Eichengreen, Jürgen von Hagen, Charles Wyplosz, Jeffrey Liebman, Robert Feldman, Friday, September 16, 2011
The 13th CEPR/ICMB Geneva Report on the World Economy takes a long-term perspective on debt sustainability, arguing that fiscal stabilisation is easier the faster the economy is growing.
Carmen M Reinhart, Kenneth Rogoff, Monday, March 28, 2011
With public debt in the US higher than it's been since 1945 and private debt burgeoning, governments are panicking about the impact of debt overhang on growth. In CEPR DP8310, Reinhart and Rogoff argue that governments have increasingly resorted to undercover restructuring by using the tools of "financial repression" that characterized the Bretton Woods era. If states continue to ignore or distort their debt problems, the authors predict, their bond markets could become ever more repressed.
Stijn Claessens, Giovanni Dell'Ariccia, Saturday, March 5, 2011
Commentators have recently floated the possibility of debt buybacks as a way of reducing a country's debt, particularly in the crisis-ridden Eurozone. Are buybacks a good idea? This column argues that, while there could be some circumstances in which debt buybacks are efficient, theory and experiences suggest that buybacks are generally costly and inefficient, and in practice (concerted) debt exchanges have been preferred.