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Benefits and Costs of Debt : The Dose Makes the Poison (English)

Government debt has risen substantially in emerging market and developing economies (EMDEs) since the global financial crisis. The current environment of low global interest rates and weak growth may appear to mitigate concerns about elevated debt levels. Considering currently subdued investment, additional government borrowing might also appear to be an attractive option for financing growth-enhancing initiatives such as investment in human and physical capital. However, history suggests caution. Despite low interest rates, debt was on a rising trajectory in half of EMDEs in 2018. In addition, the cost of rolling over debt can increase sharply during periods of financial stress and result in financial crises; elevated debt levels can limit the ability of governments to provide fiscal stimulus during downturns; and high debt can weigh on investment and long-term growth. Hence, EMDEs need to strike a careful balance between taking advantage of low interest rates and avoiding the potentially adverse consequences of excessive debt accumulation.

Details

  • Author

    Kose,Ayhan, Ohnsorge,Franziska Lieselotte, Sugawara,Naotaka

  • Document Date

    2020/02/27

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS9166

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2020/02/27

  • Disclosure Status

    Disclosed

  • Doc Name

    Benefits and Costs of Debt : The Dose Makes the Poison

  • Keywords

    board of governors of the federal reserve system; advanced economy; rate of return on capital; fiscal position; investment need; financial crisis; global financial crisis; balance of payment crisis; accumulation of government debt; public debt; persistent current account deficit; political business cycle model; cost of government borrowing; effect of government spending; fixed exchange rate regime; flexible exchange rate regime; negative net present value; quality of debt management; multilateral debt relief initiative; stock of government debt; consumption of fixed capital; tax treatment of debt; tax advantage of debt; high debt; private debt; fiscal multiplier; cost of debt; low interest rate; global economic prospect; government bond yield; debt accumulation; long-term interest rate; high debt levels; fiscal deficit; private sector debt; early warning indicator; cost of capital; optimal capital structure; fiscal policy; Fiscal policies; evolution of debt; government debt ratio; expansionary fiscal policy; economic policy research; general equilibrium model; government spending multiplier; vector autoregression model; increase in debt; excessive debt accumulation; nominal interest rate; banking crisis; Fiscal Stimulus; monetary economics; sovereign debt; risk of debt; decline in productivity; high public debt; household net worth; higher interest rate; total factor productivity; public debt sustainability; reducing public debt; public debt service; political economy considerations; composition of debt; Private Sector Growth; economies of scale; sovereign debt crisis; structure of credit; government bond market; infrastructure and growth; interest rate effect; systemic banking crisis; return to innovation; currency regime; nominal exchange rate; debt management system; foreign currency exposure; real interest rate; public debt dynamics; cost of bankruptcy; preventing currency crisis; long-term poverty reduction; education and health; sovereign credit risk; emerging market economy; return on debt; Check and Balances; primary fiscal deficit; nominal long-term bond; aspect of debt; rates of return; sustainability of debt; stock of debt; gross government debt; government spending shock; monetary policy operation; exchange rate exposure; obligation to creditors; Social Safety Nets; share of debt; financial market development; rate of growth; low output growth; exchange rate risk; exchange rate fluctuation; budget cycle; borrowing cost; safe asset; financial economics

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Citation

Kose,Ayhan Ohnsorge,Franziska Lieselotte Sugawara,Naotaka

Benefits and Costs of Debt : The Dose Makes the Poison (English). Policy Research working paper,no. WPS 9166 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/648141582830563001/Benefits-and-Costs-of-Debt-The-Dose-Makes-the-Poison