Avoiding Debt Traps [electronic resource]: Financial Backstops and Structural Reforms / Pier Carlo Padoan, Urban Sila and Paul van den Noord = Éviter les pièges de l'endettement : Assistance financière et réformes structurelles / Pier Carlo Padoan, Urban Sila et Paul van den Noord

By:

Padoan, Pier Carlo

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Material type: Article

ArticleSeries: OECD Economics Department Working Papers ; no.976.Publication details: Paris : OECD Publishing, 2012.Description: 30 p. ; 21 x 29.7cmOther title:

Éviter les pièges de l'endettement Assistance financière et réformes structurelles

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Economics

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Abstract: In this paper we develop a simple analytical framework to analyze "good" and "bad equilibria" in public-debt and growth dynamics. The "bad equilibrium" is characterised by the simultaneous occurrence, and adverse feedbacks between, high and growing fiscal deficits and debt, high risk premia on sovereign debt, slumping economic activity and plummeting confidence, whereas a "good equilibrium" is characterized by stable growth and debt and low risk premia. We use this framework to identify - both theoretically and empirically - the good and bad equilibrium levels of debt and policies that can help a country caught in a bad equilibrium to recover. The analysis shows that despite some output loss in the short run fiscal consolidation can help countries escape from the bad equilibrium trap. More broadly, we find that a combination of financial backstops, structural reform and fiscal consolidation is most effective in helping countries getting onto a sustainable path.

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Working Paper	Biblioteca Digital	Colección OECD	OECD 5k962hhtt5mr-en (Browse shelf(Opens below))	Not For Loan

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In this paper we develop a simple analytical framework to analyze "good" and "bad equilibria" in public-debt and growth dynamics. The "bad equilibrium" is characterised by the simultaneous occurrence, and adverse feedbacks between, high and growing fiscal deficits and debt, high risk premia on sovereign debt, slumping economic activity and plummeting confidence, whereas a "good equilibrium" is characterized by stable growth and debt and low risk premia. We use this framework to identify - both theoretically and empirically - the good and bad equilibrium levels of debt and policies that can help a country caught in a bad equilibrium to recover. The analysis shows that despite some output loss in the short run fiscal consolidation can help countries escape from the bad equilibrium trap. More broadly, we find that a combination of financial backstops, structural reform and fiscal consolidation is most effective in helping countries getting onto a sustainable path.

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