Debt Surges—Drivers, Consequences, and Policy Implications

Debt Surges—Drivers, Consequences, and Policy Implications
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Volume/Issue: Volume 2024 Issue 050
Publication date: March 2024
ISBN: 9798400268779
$20.00
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Topics covered in this book

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Economics- Macroeconomics , Public Finance , Economics / General , Public debt , debt surges , financial crisis , stock-flow adjustment , exchange rate depreciation , fiscal expansion , debt surge , surge episode , surge attribute , post debt path , surge debt trajectory , Contingent liabilities , Global

Summary

Many countries find themselves with elevated debt levels, increased debt vulnerabilities, and tight financing conditions, while also facing increased spending needs for development and transition to a greener economy. This paper aims to place the current debt landscape in a historical context and investigate the drivers of debt surges, to what degree they result in a crisis as well as examine post-surge debt trajectories and under what conditions debt follows a non-declining path. We find that fiscal policy and stock-flow adjustments play important roles in debt dynamics with the valuation effects arising from currency depreciation explaining more than half of stock flow adjustments in LICs. Debt surges are estimated to result in a financial crisis with a probability of 11–20 percent and spending-driven fiscal expansions during debt surges tend to result in a high probability of non-declining debt path.