Discussion Paper Details

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Title: The Motives to Borrow

Author(s): Antonio Fatás, Atish Ghosh, Ugo Panizza and Andrea Presbitero

Publication Date: May 2019

Keyword(s): Fiscal policy, political economy and public debt

Programme Area(s): International Macroeconomics and Finance, Macroeconomics and Growth and Public Economics

Abstract: Governments issue debt for good and bad reasons. While the good reasons-intertemporal tax-smoothing, fiscal stimulus, and asset management-can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing. Budgetary institutions and fiscal rules can play a role in mitigating governments' tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price-in terms of lower growth and greater output volatility-for excessive debt accumulation.

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Bibliographic Reference

Fatás, A, Ghosh, A, Panizza, U and Presbitero, A. 2019. 'The Motives to Borrow'. London, Centre for Economic Policy Research.