How to Escape from the Debt Trap: Lessons from the Past

41 Pages Posted: 18 May 2021

See all articles by Thomas Mayer

Thomas Mayer

Flossbach von Storch Research Institute

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Date Written: 2021

Abstract

Rising public debt everywhere has raised the question of how to reduce debt again in the future. High public debt also seems to be an impediment for the exit of central banks from ultra-low interest rates and quantitative easing. Historical precedents and proposals have included austerity, haircuts and the generation of inflation. Each way has advantages and disadvantages, including uncertainty about effects and side-effects. We approach the issue from an historical perspective, based on case studies of prominent approaches to debt reduction. We analyze debt reduction through economic austerity in Italy, hyperinflation in Germany after World War I, inflation in Argentina since the 1980s, currency reform in Germany after WW II, and financial repression in the United States and the United Kingdom after WW II. Finally, we discuss Ronald McKinnon’s order of economic and financial liberalization as well as the Chicago Plan combined with the introduction of central bank digital currencies as an option for the future

JEL Classification: H120, H630, P260

Suggested Citation

Mayer, Thomas and Schnabl, Gunther, How to Escape from the Debt Trap: Lessons from the Past (2021). CESifo Working Paper No. 9078, Available at SSRN: https://ssrn.com/abstract=3848340

Thomas Mayer (Contact Author)

Flossbach von Storch Research Institute ( email )

Ottoplatz 1
50679 Köln
Germany

Gunther Schnabl

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

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