Working Paper: NBER ID: w25768
Authors: Christina D. Romer; David H. Romer
Abstract: In OECD countries over the period 1980–2017, countries with lower debt-to-GDP ratios responded to financial distress with much more expansionary fiscal policy and suffered much less severe aftermaths. Two lines of evidence together suggest that the relationship between the debt ratio and the policy response is driven partly by problems with sovereign market access, but even more so by the choices of domestic and international policymakers. First, although there is some relationship between more direct measures of market access and the fiscal response to distress, incorporating the direct measures attenuates the link between the debt ratio and the policy response only slightly. Second, contemporaneous accounts of the policymaking process in episodes of major financial distress show a number of cases where shifts to austerity were driven by problems with market access, but at least as many where the shifts resulted from policymakers’ choices despite an absence of difficulties with market access. These results may have implications for the conduct of policy both in normal times and in the wake of a financial crisis.
Keywords: Fiscal Space; Financial Crises; Debt-to-GDP Ratio; OECD; Market Access
JEL Codes: E32; E62; G01; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower debt-to-GDP ratio (H63) | more expansionary fiscal policies (E62) |
| more expansionary fiscal policies (E62) | less severe economic aftermaths (F69) |
| debt-to-GDP ratio (H68) | fiscal policy decisions (E62) |
| fiscal policy decisions (E62) | overall economic recovery post-crisis (E66) |
| high-debt countries (F34) | larger output losses (F69) |
| high-debt countries (F34) | fiscal contraction after crises (E62) |
| IMF conditions (F33) | more contractionary fiscal policies (E62) |