Governments issue debt for good and bad reasons. While the good reasons-intertemporal tax-smoothing, fiscal stimulus, and asset management-can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing though budgetary institutions and fiscal rules can play a role in mitigating governments’ tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price-in terms of lower growth and greater output volatility-for excessive debt accumulation.

• Cover
• Contents
• Abstract
• I. Introduction
• II. Good Motives To Borrow
  • A. The Logic of Tax-Smoothing
  • B. Keynesian Demand Stimulus
  • C. Long-Term Investment and Deficits
  • D. Asset Management and Government Debt as Safe Asset
  • E. Dynamic Inefficiency
• III. Bad Reasons to Issue Debt
  • A. Why Do Countries Overborrow?
  • B. Controlling Overborrowing
  • C. The Unexplained Part of Public Debt
• IV. Debt, Growth and Investment
  • A. What Do the Data Say?
  • B. Not All Debts Are Equal
• V. Concluding Remarks
• References
• Figures
  • 1. The Evolution of the Debt-to-GDP ratio in G7 countrie
  • 2. Correlation Between Change in Public Debt and Contemporaneous Public
  • 3. Government Debt and Growth, Selected Advanced Economies; 1960–2016
  • 4. Government Debt and Growth, Low and Middle Income Countries; 1960–2016
  • 5. Government Debt and Subsequent GDP Growth, Selected Advanced Economies; 1960–2016
  • 6. Non-linearities and Heterogeneity in the Debt-Growth Relationship
• Boxes
  • 1. Balancing Investment Needs with Debt Sustainability, the Case of Ethiopia
  • 2. The Evolution of Italian Public Debt After World War II