Working Paper: CEPR ID: DP13735
Authors: Antonio Fatas; Atish Ghosh; Ugo Panizza; Andrea Presbitero
Abstract: 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. 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.
Keywords: public debt; fiscal policy; political economy
JEL Codes: E62; H62; H63; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political failures (P39) | overborrowing (H74) |
| political distortions (D72) | social marginal cost of debt exceeds social return (H74) |
| budgetary institutions (H61) | overborrowing (H74) |
| high public debt (H69) | lower growth (O40) |
| high public debt (H69) | greater output volatility (E39) |