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Sovereign DebtA Guide for Economists and Practitioners$
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S. Ali Abbas, Alex Pienkowski, and Kenneth Rogoff

Print publication date: 2019

Print ISBN-13: 9780198850823

Published to Oxford Scholarship Online: December 2019

DOI: 10.1093/oso/9780198850823.001.0001

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The Motive to Borrow

The Motive to Borrow

Chapter:
(p.102) 3 The Motive to Borrow
Source:
Sovereign Debt
Author(s):

Antonio Fatás

Atish R. Ghosh

Ugo Panizza

Andrea F. Presbitero

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198850823.003.0004

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 observed 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 and budgetary institutions and fiscal rules can play a role in mitigating the tendency to overborrow. While it is difficult to establish a clear causal link from high public debt to low growth, it is likely that some countries might be paying a price in terms of lower growth and greater output volatility because of excessive debt accumulation.

Keywords:   Political economy, investment, human capital, fiscal deficit, growth, debt

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