DP13735 The Motives to Borrow

Author(s): Antonio Fatás, Atish Ghosh, Ugo Panizza, Andrea Presbitero
Publication Date: May 2019
Date Revised: May 2019
Keyword(s): Fiscal policy, political economy, public debt
JEL(s): E62, H62, H63, P16
Programme Areas: Public Economics, International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13735

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.