Not until the enlightenment and the financial revolution in the eighteenth century did sovereigns borrow publicly, regularly, and responsibly. Reinhart university of maryland and the nber and kenneth s. Domestic debt and sovereign defaults federal reserve bank. E6,f3,n0 abstract there is a rich scholarly literature on sovereign default on external debt. The question of what is a sustainable public debt has always been paramount in the macroeconomic analysis of scal policy, and the recent surge in the debt of many advanced and emerging economies has made it particularly critical.
The debt surge has been followed by efforts to gradually stabilize debt at a very high level, with an eye towards eventually maneuvering a longterm gradual exit from that seldomtravelled region. International finance and macroeconomics, public economics there is a rich scholarly literature on sovereign default on external debt. A comprehensive look at international financial crises that puts more recent economic meltdowns into perspectivethroughout history, rich and poor countries alike have been lending, borrowing, crashingand recoveringtheir way through an extraordinary range of financial crises. There is a rich scholarly literature on sovereign default on external debt. Working paper series no 1237 august 2010 the view is sometimes expressed professor aba p.
Then came world war ii, when the debt togdp ratio would rise above 77 percent for the first time in the nations history, reaching 1 percent an alltime record by the end of that conflict. The literature on domestic debt default is sparse, as are the data. Sep 18, 2017 treasury bills and bonds account for 97. Second, the data help to explain the puzzle of why countries default on external debts at seemingly low debt thresholds. While domestic debt dynamics are relevant to understand sovereign default episodes, very little research has been devoted to it. We spend some time going through the history of the debt buildup, since its genesis and dynamics are germane to any ultimate resolution. In brazil, domestic debt was nearly 20 times the money base. Lerner and professor domar that a domestic national debt means merely that citizens as potential taxpayers are indebted to themselves as holders of government debt, and that it can, therefore, have little effect upon the economy. In particular, four features of this crisis make it more akin to a. Stories of forgotten history, all between five and fifteen minutes long. The analysis, based on a panel of advanced and emerging economies over almost four decades, takes into account a broad range of determinants of growth as well as various estimation issues including reverse causality and endogeneity.
Domestic and external public debt in developing countries ugo panizza no. Third, domestic debt which is often larger than the monetary base in the runup to high inflation has largely been ignored in the inflation literature. See lane 2012 and reinhart, reinhart, and rogoff, 2012 for an overview of both domestic and external debt. The forgotten history of domestic debt by carmen m. Given that a significant amount of this debt is the result of governmental efforts to mitigate the effects of the financial crisis, the.
A guide to sovereign debt data, wp19195, september 2019. Commercial banks, other financial institutions etc. It is generally agreed that the rapid rise of public debt in most of the developed countries can be traced to the recent financial crisis, and the accompanying slump contributed to this problem. Citations of the forgotten history of domestic debt.
This question is often understood as equivalent to asking whether the government is solvent. We propose a heterogeneousagents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous. Many models assume that domestic debt is always honoured, not leas t because governments could simply print money and inflate the problem away. First, domestic debt accounts for almost twothirds of public debt. Distributional incentives lead to default unless costs are sufficiently high or gov. Yet bank portfolios were almost entirely domestic from 1945 to 1980, the period in history with fewest banking and debt crises reinhart and rogoff, 2009. Rogoff the literature on domestic debt default is sparse, as are the data. Even today, crosscountry data on domestic public debt remains curiously exotic, particularly prior to the 1980s. Rogoff authorized for distribution by stijn claessens december 20 abstract even after one of the most severe multiyear crises on record in the advanced. Our findings on debt sustainability, sovereign defaults, the temptation to inflate, and the hierarchy of creditors only scratch the surface of what the domestic public debt data can reveal. The european debt crisis, historically high public debt. Largely a \forgotten story in macroeconomics literature optimal domestic and external sovereign defaultpablo derasmo and enrique mendoza.
The forgotten history of domestic debt harvard university. They study domestic debt dynamics from 1914 to 2007 in a sample of 64 countries and nd a \ forgotten history of domestic debt. However, president andrew jackson shrank that debt to zero in 1835. While domestic debt may not explain every situation, it does appear to play a major role in many periods of high inflation and hyperinflation. Optimal sovereign default on domestic and external debt. Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a forgotten history in macroeconomics. Public debt and growth by manmohan kumar, jaejoon woo ssrn. Pdf the forgotten history of domestic debt carmen m.
While domestic debt is relevant to understand sovereign default episodes, very little research has been devoted to it. In 1920, when germanys inflation surged to 66 percent, its domestic debt was nearly three times the size of its monetary base. This paper discusses alternative definitions of external and domestic debt and then introduces a new dataset on domestic and external public debt. Internal government debt s complement is external government debt. The authors are grateful to vincent reinhart, john singleton, and seminar participants at columbia, harvard, and maryland universities for useful comments and suggestions and to ethan ilzetzki for excellent research assistance. This paper explores the impact of high public debt on longrun economic growth. This has sparked debate about the likely adverse macroeconomic impacts of persistent large debts especially on longterm economic growth. The liquidation of government debt, november 2011 bis.
Citeseerx document details isaac councill, lee giles, pradeep teregowda. The forgotten history of domestic debt reinhart 2011 the. In particular, four features of this crisis make it more akin to a domestic default than to the typical external default that dominates. Each time, the experts have chimed, this time is differentclaiming that the old rules of valuation no longer. Recent events raising the prospect of domestic defaults in advanced economies make this history much harder to forget. Search the history of over 431 billion web pages on the internet. It is widely accepted today that economic downturns require massive countercyclical government interventions, such as increased government spending to stimulate the economy, and suppression of interest rates by the federal reserve to encourage. Internal debt or domestic debt is the part of the total government debt in a country that is owed to lenders within the country. The history of the united states public debt started with federal government debt incurred during the american revolutionary war by the first u. S treasurer, michael hillegas, after its formation in 1789. Pdf this paper examines how domestic holdings of government debt affect sovereign default risk and government debt management.
Economic growth a priority to boost tax revenue gigaba. The forgotten history of domestic debt ebook, 2008. In recent years there has been a debt ceiling in effect. Yet rogoff and reinhart 2009 show that domestic debt has been important in most periods across much of the world. Lane and milesiferretti 2010, for a careful and extensive historical reconstruction of external debt since. Last, the widelyheld view that domestic residents are strictly junior to external creditors does not find broad support. Rogoff harvard university and the nber abstract there is a rich scholarly literature on sovereign default on external debt. Kenneth s rogoff there is a rich scholarly literature on sovereign default on external debt. We compile a database on public debt that spans the nineteenth century to. For most of the sample, this debt carries a market interest rate except for the financial repression era between wwii and financial liberalization. Despite of these striking features, they also found that domestic sovereign default is a forgotten history that remains largely unexplored in economic research. Domestic debt is a large fraction of public debt 23rds on average and higher in developed countries 4.
Cecchetti, mohanty and zampolli the real effects of debt 334 they are working not only to understand the sources of systemic risk, but also on how to measure it and mitigate it. History of the united states public debt wikipedia. We compile a database on public debt that spans the nineteenth century to 2010. Internal government debts complement is external government debt. Comparatively little is known about sovereign default on domestic debt.
View references in econpapers view complete reference list from citec. The forgotten history of domestic debt reinhart 2011. They study domestic debt dynamics from 1914 to 2007 in a sample of 64 countries and nd a \forgotten history of domestic debt. This fact which was first emphasized in reinhart, rogoff, and savastano 2003 may sound incredible to those who are not empirical researchers using macroeconomic data. The forgotten history of domestic debt article pdf available in the economic journal 121552. A sovereign default, where a government suspends debt repayments. The ongoing european debt crisis also highlights the importance of studying domestic sovereign default.
The views expressed herein are those of the authors and do not. First, domestic debt is big for the 64 countries for which we have long time series, domestic debt accounts for almost twothirds of total public debt. Third, domestic debt which is often larger than the monetary base in the run. A debt restructuring plan, where the government agrees with other countries, or unilaterally reduces its debt repayments. The forgotten history of domestic debt semantic scholar. Some lessons learned and those forgotten1 prepared by carmen m. The forgotten history of domestic debt kenneth rogoff. In fact, domestic debt a significant portion of which is long term and nonindexed is often much larger than the monetary base in the runup to high inflation episodes.
Three centuries of data show that public leverage the ratio of public debt to gdp was. Public debt and spreads rise sharply before defaults 5. The list of sovereign debt crises involves the inability of independent countries to meet its liabilities as they become due. The united states has continuously had a fluctuating public debt since then, except for about a. We have recently unearthed a vast trove of historical timeseries data on domestic public debt for. It uses this dataset to describe recent trends in the composition of public debt in developing countries and discusses the reasons for these trends. The forgotten history of domestic debt scholars at harvard. In fact, reinhart and rogoff document that, while domestic default has been somewhat le ss frequent than for external debt, it has. A debt restructuring plan, where the government agrees with other countries, or. First, domestic debt is bigfor the 64 countries for which we have long time series, domestic debt accounts for almost twothirds of total public debt. The national debt as a percentage of the gross domestic product. Throughout history, debtgdp ratios have been reduced by i economic growth. Government debt up as growth falters in ailing economy fin24.
Indeed, a great deal of the external debt underlying the european sovereign debt crisis is intraeuropean and can therefore be viewed as occupying gray area between sovereign and subsovereign debt. Comparatively little is known about sovereign defaults on domestic debt. Contents 1 on the experience of moral confusion 2 the myth of barter 3 primordial debts 4 cruelty and redemption s a brief treatise on the moral 21 43 73 grounds of economic relations 89 6 games with sex and death 127 1 honor and degradation, or, on the foundations of contemporary civilization 165 s credit versus bullion, and the cycles of history 211. Third, domestic debt has largely been ignored in the vast empirical work on inflation. The forgotten history of domestic debt acknowledgments and.
118 890 96 1485 896 834 1147 1312 891 660 134 1476 206 382 943 685 1241 789 362 666 1538 1618 1365 1615 986 743 1476 640 145 170 1613 1592 753 1163 121 363 288 117 31 872 275 495 110 201 15 27 1011