High public debt in an uncertain world: Post-Covid-19 dangers for public finance

Bericht

In this EconPol Policy Brief Daniel Gros cautions countries with high debt ratios not to simply rely on low interest rates to make their (Covid-19) debt sustainable. Now that the health emergency is subsiding, governments have to chart a new course for public finance. The starting point is a higher level of public debt. However, high debt ratios represent a danger, even when interest rates are low. The key reason is increased uncertainty of growth prospects in a post-Covid-19 economy, coupled with an uncertainty regarding the probability of future large shocks. A prudent policy would therefore be to start reducing debt levels to pre-crisis levels as soon as the economy normalizes, according to the author. Key messages: High debt ratios represent a danger, even if interest rates are low. - The key reason is increased uncertainty of growth prospects in a post-Covid economy coupled with and uncertainty with regard to the probability of future large shocks. - Large negative shocks are more frequent than assumed in standard models. - Another reason is that the cost of public debt might increase more than linearly as the debt ratio rises. - Large negative shocks create much more problems when debt is already high.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: EconPol Policy Brief ; No. 38

Classification and Topics

• Classification: Wirtschaft
• Subject: Öffentliche Schulden ; Coronavirus ; Welt

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gros, Daniel
• Event: Veröffentlichung
• (who): ifo Institute - Leibniz Institute for Economic Research at the University of Munich
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/245908