Dealing with Debt

Abstract

This paper explores the menu of options for renormalizing public debt levels relative to nominal activity in the long run, should governments eventually decide to do so. Orthodox ones for medium-term debt stabilization, the standard fare of officialdom, include enhancing growth, running primary budget surpluses, and privatizing government assets. Heterodox polices include restructuring debt contracts, generating unexpected inflation, taxing wealth, and repressing private finance. We examine 70 episodes across 22 advanced economies from 1800 to 2014 where there were significant and sustained reductions in public debt relative to nominal GDP. In the event, advanced countries have relied far more on heterodox approaches than many observers choose to remember.

Keywords: public debt, debt reversals, restructuring, financial repression, inflation, wealth taxes, privatization

JEL Classification: H63, E43