When Should Public Debt Be Reduced?

What considerations should guide public debt policy going forward? Should debt be reduced to achieve normative anchors (such as 60 percent of GDP), should it be increased further to finance a big public investment push, or should the existing debt be serviced forever? We argue that, for countries wi...

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Bibliographic Details
Main Author: Ostry, Jonathan
Other Authors: Ghosh, Atish, Espinoza, Raphael
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2015
Series:Staff Discussion Notes
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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653 |a Interest rates 
653 |a National Government Expenditures and Related Policies: Infrastructures 
653 |a Public debt 
653 |a Public investment spending 
653 |a Finance 
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653 |a Debt Management 
653 |a Debts, Public 
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653 |a Debt 
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653 |a Market interest rates 
653 |a Banks and Banking 
653 |a Expenditures, Public 
653 |a Forecasts of Budgets, Deficits, and Debt 
653 |a Macroeconomics 
653 |a Fiscal space 
653 |a Public investments 
653 |a Interest Rates: Determination, Term Structure, and Effects 
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520 |a What considerations should guide public debt policy going forward? Should debt be reduced to achieve normative anchors (such as 60 percent of GDP), should it be increased further to finance a big public investment push, or should the existing debt be serviced forever? We argue that, for countries with ample fiscal space (little risk of encountering a fiscal crisis), raising distortive taxes merely to bring the debt down is a treatment cure that is worse than the disease. High public debt of course is costly, but it is a sunk cost only made worse by efforts to pay down the debt through distortionary taxation. Living with the debt is the welfare-maximizing policy. In decisions vis-à-vis the big push for public investment, golden-rule considerations remain salient, with due account taken of the additional servicing costs (and associated distortive taxation) from the resulting buildup of public debt