Economic Policy
Vol. 30, Issue 82, Pages 291-333
March 2015
Abstract
High public debt often produces the drama of default and restructuring. But debt is
also reduced through financial repression (FR), a tax on bondholders and savers
via negative or below-market real interest rates. After World War II, capital controls
and regulatory restrictions created a captive audience for government debt, limiting
tax-base erosion. FR is most successful in liquidating debt when accompanied
by inflation. For the advanced economies, real interest rates were negative half of the
time during 1945–80. Average annual interest expense savings for a 12-country
sample range from about 1% to 5% of GDP for the full 1945–80 period. We suggest
that, once again, FR may be part of the toolkit deployed to cope with the most recent
surge in public debt in advanced economies.
Citation
Reinhart, Carmen M., and M. Belen Sbrancia. "The Liquidation of Government Debt." Economic Policy 30.82 (March 2015): 291-333.