Debt is Not Free

69 Pages Posted: 23 Jan 2020

See all articles by Marialuz Moreno Badia

Marialuz Moreno Badia

International Monetary Fund (IMF)

Paulo A. Medas

International Monetary Fund (IMF)

Pranav Gupta

International Monetary Fund (IMF)

Yuan Xiang

International Monetary Fund (IMF)

Date Written: January 2020

Abstract

With public debt soaring across the world, a growing concern is whether current debt levels are a harbinger of fiscal crises, thereby restricting the policy space in a downturn. The empirical evidence to date is however inconclusive, and the true cost of debt may be overstated if interest rates remain low. To shed light into this debate, this paper re-examines the importance of public debt as a leading indicator of fiscal crises using machine learning techniques to account for complex interactions previously ignored in the literature. We find that public debt is the most important predictor of crises, showing strong non-linearities. Moreover, beyond certain debt levels, the likelihood of crises increases sharply regardless of the interest-growth differential. Our analysis also reveals that the interactions of public debt with inflation and external imbalances can be as important as debt levels. These results, while not necessarily implying causality, show governments should be wary of high public debt even when borrowing costs seem low.

Keywords: Domestic debt, Financial statistics, Public debt, Negative interest rates, Economic analysis, crisis, debt, default, fiscal, machine learning, WP, fiscal crisis, predictor, income group, debt level, Reinhart

JEL Classification: E43, E62, F34, F37, H63, E01, F3, G21, C

Suggested Citation

Moreno-Badia, Marialuz and Medas, Paulo A. and Gupta, Pranav and Xiang, Yuan, Debt is Not Free (January 2020). IMF Working Paper No. 20/1. Available at SSRN: https://ssrn.com/abstract=3524324

Marialuz Moreno-Badia (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Paulo A. Medas

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Pranav Gupta

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yuan Xiang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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