Options for Managing a Sudden Rise in Public Debt

Abstract

Debate has raged over whether and when debt reduction is appropriate, particularly in advanced economies. Arguments for lowering public debt are based on the costs and risks generated by high public debt; debt reduction is generally deemed appropriate when the risks associated with it are greater than those associated with debt-reducing policies (Best et al 2018: 2). The literature on public debt reduction can be grouped into three broad strands (i) studies that describe episodes of debt accumulation and its sources; (ii) studies that assess the economic implications of high debt (on economic growth and interest rates); and (iii) studies that focus on debt reduction episodes, fiscal adjustment and its impact on the economy (Baldacci et al 2012: 370). This review draws mainly from the third strand. Options for managing high public debt generally fall into three categories: Conventional options, Unconventional options and Radical options. This report focuses on the first two categories. The more radical approaches to dealing with high public debt are considered out-of-scope for this particular research question.