1
100 120 140 160 20 40 60 80 0 1880 1883 1886 1889 1892 1895 1898 1901 1904 Publi 1907 1910 1913 WWI lic De 1916 1919 Debt-to 1922 Advanced Economies: Depression 1925 1928 Great 1931 to-GDP Ra 1934 1937 1940 WWII 1943 1946 Ratio, 18 1949 1952 1955 1958 1961 1880 1964 1967 80-2016 1970 1973 2016 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 financial Global 2012 crisis 2 2015
Publi lic debt-to to-GDP ratio (in (in percent, 20 2015 15) 300 250 200 150 100 50 0 3
Hold ldin ings of f publi lic debt by resid sidents (in (in percent of f total l publi lic debt, 2015) 100 90 80 70 60 50 40 30 20 10 0 4
Source: IMF Fiscal Monitor April 2016, Table A23 100 150 200 -50 50 1 Net present value of increases in public spending for healthcare (red) and pension (blu) as projected 0 Korea by the IMF Fiscal Monitor for 2016-2050 United States Netherlands New Zealand Belgium Switzerland Portugal Pension an Luxembourg Iceland Spain Norway and heal Germany (in (in per Austria Australia ercent of althcare entit Slovenia Ireland Finland Lithuania of GDP) Canada United Kingdom itlement debt Japan Italy Hong Kong SAR Slovak Republic Czech Republic Israel Singapore6 1 France Denmark Malta Cyprus Estonia Sweden 5 Latvia
Why is is hig igh public debt a problem? 1.Exposure to a roll over crisis 2.Lower long term growth 6
Exposure to a roll over crisis 7
Charles Ponzi (Lugo di Romagna, 1882 – Rio de Janeiro 1949) 8
IM IMF Public debt sustainability th thresholds ❖ Emerging economies: 70 percent of GDP ❖ Advanced economies: 85 percent of GDP (high risk) ❖ Advanced economies: 120 percent of GDP (unsustainable debt?) 9
Spread dell’Italia sulla lla Germania (rendimento dif ifferenzia iale a a 10 10 an anni BTP TP-BUND) 10
1 Surge in money base USA JAPAN 5000 400000 4000 300000 3000 200000 2000 1000 100000 0 0 UK EURO AREA 400000 2500 350000 2000 300000 250000 1500 200000 1000 150000 100000 500 50000 0 0 Monetary base Central Bank’s credit to government 1 In national currency 11
Lower long term GDP growth 12
Why doe oes hig igh publi lic deb ebt lo lower lon long-term growth? 1. Crowding out: “I have a long argued that paying down the national debt Olivier Blanchard, is beneficial for the economy: “Current and it keeps interest rate lower anticipated deficits, than they otherwise would be interest rates and and frees savings to finance economic activity” increases in the capital stock, NBER WP n. 1265, 1984 thereby boosting productivity and real incomes.” Speech held by Alan Greenspan on April 27, 2001 2. Higher Taxes David Ricardo 13
0,0% 1,0% 2,0% 3,0% 4,0% 5,0% 6,0% 7,0% Singapore Korea Taiwan Province of China Ireland Israel Lithuania* Latvia* Estonia* Hong Kong SAR Annual Slovak Republic* (in Luxembourg in percent, 1990-2015) Australia New Zealand l average growth rate Iceland Cyprus Slovenia* United States Norway Czech Republic* Canada Sweden Spain United Kingdom * Data for these countries are available since 1995 Netherlands Austria Belgium Finland Switzerland France Denmark Germany Portugal Japan Greece Italy 14
Hig igh publi lic debt lo lowers potentia ial l growth ➢ Kumar, M., and J. Woo, 2010, ―Public Debt and Growth,‖ IMF Working Paper No. 10/174. ➢ Checherita, C. and P. Rother , 2010, ―The impact of high and growing government debt on economic growth an empirical investigation for the euro area,‖ IMF Working Paper No. 1237 ➢ Cecchetti, S. G., M. S. Mohanty and F. Zampolli , 2011, ―The Real Effects of Debt,‖ BIS Working Paper No. 352. ➢ Reinhart, C. and K. Rogoff, 2010, ―Growth in a Time of Debt,‖ NBER Working Paper No. 15639. 15
Rela latio ionship ip betw tween publi lic debt le level l an and GDP growth Real per capita GDP growth rate -1 percentage point +60 percentage points Public debt/GDP 16 Source: Kumar M., Woo J., Public Debt and Growth, IMF Working Paper, 2010
How to lower public debt 17
Shortcuts 1. Printing money 2. Financial repression 3. Debt repudiation 4. Debt mutualization 5. Privatiziation 18
1. . Pri rinting money: what monetary policy can do to alleviate th the effects of f hig igh public debt • Printing money to temporarily finance the government if the demand for liquidity surges (current situation; see above) • Stand ready to provide liquidity at times of market pressure (fighting self-fulfilling expectations). (See de Grauwe, Paul and Ji, Yuemei (2016) Flexibility versus stability: a difficult tradeoff in the Eurozone, Credit and Capital Markets) • Risk Inflation 19
1. . Prin rinting mon oney: In Infl flation as as a a sol solution to o th the e public lic deb ebt prob oblem • How much inflation? • It depends on whether the Fisher effect holds • If the FE holds, moderate inflation is not enough • An inflation outburst (20-25 percent for 2 years would be needed ) • Costs: - inflation is a tax Source: IMF Fiscal Monitor, April 2013 - inflation genie out of the bottle - the case of Turkey • Altogether: not a great idea 20
Should Euro Area countries le leave th the euro area? Nobel Prize winners against the euro Joseph Stiglitz Paul Krugman Amartya Sen Christopher Pissarides James Mirrlees Milton Friedman 21
Real l GDP per capit ita, 1980-2015 (index 1980 = 100) (in 180,0 Rest of the Euro Area 170,0 160,0 150,0 Italy 140,0 130,0 120,0 110,0 100,0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Source: Eurostat 22
Nominal unit it la labor costs per person, 2000-2015 2000 2015 (index 2000 = 100) 145,0 140,0 Spain 135,0 Italy 130,0 Portugal 125,0 120,0 France 115,0 Germany 110,0 105,0 100,0 95,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Eurostat 23
2. . Fin Financial repression Reinhart, C. M., M. B. Sbrancia, The liquidation of government debt, IMF Working Paper 16893M • Accidental financial repression? - surge in base money - tight bank regulation (equity requirenments) - lower interest rates and low bank profits - will it last? 24
3. . Debt repudia iation a. Reputational costs • Borensztein, E., and U. Panizza, The Costs of Sovereign Default, IMF Staff Papers 2009, 56 (4): 683 – 741. • Cruces, J. J., C. Trebesch, Sovereign Defaults: The Price of Haircuts American Economic Journal: Macroeconomics 2013, 5(3): 85 – 117 b. Not alternative to austerity c. High spillover effects Italian public debt in euro Italy 2016 = 2219 billion Grecee 2011 = 356 billion 25
4. . Debt mutuali lization ❖ Pulling together public debt in the euro area (to replace the debt of individual states) would be nice but... ❖ … it will not happen… ❖ …because it does not happen even in monetary areas that achieved political union (federal states) 26
5. . Priv ivatizatio ion Privatization may be good ❖ But there is not enough left to privatize ❖ Italy: optimistic estimates: 15 percent of GDP in 10 years (against a public debt of >130 percent of GDP and average privatization revenues of 0.25 of GDP in 2011-15). 27
The hig ighway: 1. Structural reforms to boost growth 2. A moderate level of fiscal austerity 28
1. . Th The effect t of f gr growth th on th the public debt-to to-GDP ratio tio debt ratio 140% baseline 130.0% 130% +1% (growth increase if revenues are not saved) 120% -10.8% -16.5% 110% +1% growth 100% -28.6% 90% 80% -58.1% 70% 60% years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 29
How can we boost growth? Pulling oneself up by one’s bootstraps (higher deficit)? - Plain lain vanill lla ver ersion doe oes not ot wor ork (t (tem emporary gr growth im impact, - per ermanent d defi ficit t im impact, public lic deb ebt t may in initial itially ly dec eclin line e but t th then en increases) in Non on plain lain vanilla illa stories (L (Left win ing ver ersion): - o Tem emporary ry in increases in in sp spen endin ing raises pot oten entia ial l ou outp tput per ermanently ly (lo (lower hysteresis) (R (Romer, de e Lon ong, g, Su Summers) o Tem emporary ry in increases in in public lic sp spen endin ing boo oost not ot on only ly rea eal l GDP but t als lso th the in infla flati tion for or a while ile (IM (IMF, th the 3C approach) o Problemati tic assu ssumptions: (i) (i) in inter erest rates do o not ot ris rise; (ii) (ii) sp spen endin ing in increases are reversed ed at t th the e ri right tim time. Non on plain lain vanilla illa stories (ri (right win ing ver ersion): - o Reaganomics, Tru rumponomics: tax cuts ts rais ise pot otentia ial gr growth th o Problem: it it doe oes not ot w work (p (public lic deb ebt t in increased under er Rea eagan) ➔ you ou nee eed str tructural reforms to o boo oost gr growth (b (but t it it takes tim time) e) 30
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