Journal Article

The liquidation of government debt

Carmen M. Reinhart and M. Belen Sbrancia

in Economic Policy

Published on behalf of Center for Economic Studies of the University of Munich

Volume 30, issue 82, pages 291-333
Published in print April 2015 | ISSN: 0266-4658
Published online March 2015 | e-ISSN: 1468-0327 | DOI: https://dx.doi.org/10.1093/epolic/eiv003
The liquidation of government debt

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  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Prices, Business Fluctuations, and Cycles
  • Macroeconomics and Monetary Economics; Growth and Fluctuations
  • International Finance
  • National Budget, Deficit, and Debt
  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression (FR), a tax on bondholders and savers via negative or below-market real interest rates. After World War II, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. FR is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative half of the time during 1945–80. Average annual interest expense savings for a 12-country sample range from about 1% to 5% of GDP for the full 1945–80 period. We suggest that, once again, FR may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.

Keywords: E2; E3; E6; F3; F4; H6; N10

Journal Article.  17204 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Prices, Business Fluctuations, and Cycles ; Macroeconomics and Monetary Economics; Growth and Fluctuations ; International Finance ; National Budget, Deficit, and Debt ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Macroeconomic Aspects of International Trade and Finance

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