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Rising Government Debt: Causes and Solutions for a Decades-Old Trend

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  • Pierre Yared

Abstract

Over the past four decades, government debt as a fraction of GDP has been on an upward trajectory in advanced economies, approaching levels not reached since World War II. While normative macroeconomic theories can explain the increase in the level of debt in certain periods as a response to macroeconomic shocks, they cannot explain the broad-based long-run trend in debt accumulation. In contrast, political economy theories can explain the long-run trend as resulting from an aging population, rising political polarization, and rising electoral uncertainty across advanced economies. These theories emphasize the time-inconsistency in government policymaking, and thus the need for fiscal rules that restrict policymakers. Fiscal rules trade off commitment to not overspend and flexibility to react to shocks. This tradeoff guides design features of optimal rules, such as information dependence, enforcement, cross-country coordination, escape clauses, and instrument vs. target criteria.

Suggested Citation

  • Pierre Yared, 2018. "Rising Government Debt: Causes and Solutions for a Decades-Old Trend," NBER Working Papers 24979, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24979
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    References listed on IDEAS

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    1. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 1-19.
    2. Alberto Alesina & Guido Tabellini, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 403-414.
    3. Manuel Amador & Kyle Bagwell, 2013. "The Theory of Optimal Delegation With an Application to Tariff Caps," Econometrica, Econometric Society, vol. 81(4), pages 1541-1599, July.
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    Cited by:

    1. Antonio Fatás & Atish R. Ghosh & Ugo Panizza & Andrea F Presbitero, 2019. "The Motives to Borrow," IMF Working Papers 19/101, International Monetary Fund.
    2. Marta Gómez-Puig & Simón Sosvilla-Rivero & Inmaculada Martínez-Zarzoso, 2019. "Re-examining the debt-growth nexus: A grouped fixed-effect approach," Documentos de Trabajo del ICAE 2019-21, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    3. Ryota Nakatani, 2019. "A Possible Approach to Fiscal Rules in Small Islands — Incorporating Natural Disasters and Climate Change," IMF Working Papers 19/186, International Monetary Fund.
    4. Frank, Marco & Stadelmann, David, 2019. "Do more Federal Legislators Lead to More Resources for their Constituencies?," Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203521, Verein für Socialpolitik / German Economic Association.
    5. Marco Frank & David Stadelmann, 2019. "More Federal Legislators Lead to More Resources for Their Constituencies: Evidence from Exogenous Differences in Seat Allocations," CREMA Working Paper Series 2019-05, Center for Research in Economics, Management and the Arts (CREMA).
    6. Daniele, SCHILIRO', 2019. "Public debt and growth in Italy:Analysis and policy proposals," MPRA Paper 97950, University Library of Munich, Germany, revised Nov 2019.
    7. Coate, Stephen & Milton, Ross T., 2019. "Optimal fiscal limits with overrides," Journal of Public Economics, Elsevier, vol. 174(C), pages 76-92.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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