Debt and Macroeconomic Behavior: Austerity and Restructuring in an Age of Uncertainty

This article reviews the panel discussion of “Debt and Macroeconomic Behavior” at the Initiative for Policy Dialogue-Centre for International Governance Innovation conference on sovereign debt restructuring held at Columbia University, New York, September 22, 2015. The session featured three presentations covering the welfare costs of high debt loads, the potential for fiscal austerity to be expansionary and the nexus between expectations, debt and crises. Jonathan Ostry focused on the conditions under which a government should actively pursue debt reduction as opposed to “living with the debt” in his presentation, When Should Public Debt be Reduced? Where debt burdens do not pose a default risk, governments should be content to allow the debt-to-GDP ratio to decline as a result of economic growth. This result is juxtaposed against the contention that debt reduction can be expansionary, which gained influence in policy circles in the wake of the global financial crisis. As Michael Konczal explained in his presentation Searching for Expansionary Austerity, the basis for this claim rests on a few special cases; the empirical evidence does not support the view that debt reduction is always and everywhere good policy. The third presentation, Crises: Principles and Policies by Joseph Stiglitz, reviewed the critical role of expectations in determining long-run steady states and creating the potential for multiple equilibria. Crises can reflect the sudden revision of expectations and the switching of equilibrium. While such a phenomenon sits uneasily with the modeling paradigm of much of recent economic theory, it is difficult to understand events in the Eurozone over the past half-decade in terms of a unique rational expectations equilibrium in which unstable paths are precluded a priori.