Public debts soared in the wake of the global
financial crisis and the COVID-19 pandemic, with gross debt levels
rising by about 15% of world GDP on both occasions. At some point,
governments will have to pivot toward debt consolidation. They will
attempt to reduce debt-to-GDP ratios in order to prevent debt service
costs from crowding out other public programmes and debt overhangs from
becoming a burden on private investment. They will take steps to
enhance and restore their capacity to borrow in order to meet the next
emergency.
In the past, some governments have relied on inflation to reduce and
even liquidate heavy debts, Weimar Germany being a textbook example
(Feldman 1997). Similarly, there is discussion currently of whether
inflation will be part of the response to current debt problems (e.g.
Goodhart and Pradhan 2020), though few would credit the likelihood of a
Weimar-like scenario in the advanced countries.
What we do
In a recent paper (Eichengreen and Esteves 2022), we analyse the role
of inflation in debt consolidations over the last 220 years. We build a
database of historical debt consolidation episodes covering a maximum
of 183 countries and apply an accounting framework to distinguish the
role of inflation.
This is, to our knowledge, the first attempt to assemble a worldwide
historical database of debt consolidations spanning such a long period,
although it is preceded by important country studies (e.g. Hernandez de
Cos et al. 2016 for Spain, Wickens 2022 for the UK), on which we build.
It is similarly the first attempt to apply a framework explicitly
distinguishing the role of inflation to a large debt-consolidation
dataset.
We define debt consolidation in a number of different ways. At one
extreme, we include episodes of any duration (one year or longer) over
which the debt/GDP ratio fell by at least 10 percentage points. At the
other, we include episodes lasting at least 10 years and involving a
decline in debt/GDP of at least 15 percentage points. We allow for
interruptions – periods when the ratio rose – so long as these were no
more than two years in length. We identify as many as 283 debt
consolidation episodes over two-plus centuries.
Consolidation episodes
Figure 1 shows a histogram of consolidation durations (in years). It
spans the long 19th century (through 1913), the interwar period, the
years from WWII to the Latin American debt crisis, and the subsequent
period. In all four eras, the histogram is skewed to the right, with
most episodes lasting fewer than 15 years, apart from some exceptionally
long consolidations in the third period (1945–82).
Figure 1 Histogram of consolidation durations (in years)