The Liquidation of Government Debt

By Carmen M. Reinhart. Social Science Research Network, 2015

331 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/0c541e2ecbe20f81cdcc68213ad00fbd3470d364

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Citations in the corpus

Financial Repression in the European Sovereign Debt Crisis (2017, positive): “Although financial repression policies are traditionally associated with developing countries, Reinhart and Sbrancia (2011) show that such practices were the norm for many advanced economies for over thirty years following the end of World War II.”
The Invisible Hand of the Government: Moral Suasion during the European Sovereign Debt Crisis (2019, neutral): “Furthermore, they are more likely, at some point, to need assistance from the government and are more vulnerable to explicit and implicit threats if they refuse to cooperate (Romans, 1966; Reinhart and Sbrancia, 2015).”
Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten (2013, neutral): “As Reinhart and Sbrancia (2011) show, a mix of financial repression and inflation can be a particularly potent way of reducing domestic-currency debt.”
Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China (2016, neutral): “Although financial repression can help avert a ‘financial meltdown’, the measures negatively impact economic welfare (Reinhart and Sbrancia, 2015).”
Rethinking Macro Policy II; Getting Granular (2013, neutral): “…attracted renewed attention—notably the United States in the second half of the 1940s, when inflation resulted in significantly negative real interest rates and, over time, lower debt ratios (see Reinhart and Sbrancia, 2011, who suggest that a return to financial repression is a potential concern).”