It is very well known that growth rates play a role in debt dynamics. Despite this widespread knowledge real world narratives of public debt crises often focus almost exclusively on budget deficits and neglect the role of growth. This paper presents the simplest arithmetic possible to illustrate how growth slowdowns could contribute to rapid increases in public debt to GDP ratios. It shows that growth slowdowns have indeed played a role in a wide variety of well known debt crises. It then considers what would be good practice for precautionary fiscal policy focusing in particular on conservative forecasts of future growth. Unfortunately political economy incentives cause policymakers to violate such good forecast practices with a systematic tendency to excessive optimism about future growth. There even appears to be some anecdotal examples of even worse optimism biases when the debt crises are worse
Attribution-NonCommercial-NoDerivs 3.0 Chile
Except where otherwise noted, this item's license is described as Attribution-NonCommercial-NoDerivs 3.0 Chile