The Liquidation of Government Debt

Author/Editor:

Carmen Reinhart ; M. Belen Sbrancia

Publication Date:

January 21, 2015

Electronic Access:

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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:

High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or belowmarket real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative ½ of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5 percent of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.

Series:

Working Paper No. 2015/007

Subject:

Asset and liability management Debt reduction Financial services Inflation Monetary policy Negative interest rates Prices Public debt Real interest rates

English

Publication Date:

January 21, 2015

ISBN/ISSN:

9781484369234/1018-5941

Stock No:

WPIEA2015007

Pages:

47

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