High debt in the euro area post COVID
In this paper Burriel and al. use three large scale DSGE models designed for the euro area to evaluate the economic risks associated with regimes of high public debt in a post-COVID world.
First, we explicitly account for the heterogeneity within the euro area. The models are calibrated or estimated for different regions/countries, with the euro area being split into either core vs. periphery (for EAGLE and the BE model) or Germany vs. the rest of the EA (for GEAR). Second, and, more crucially, the three models enrich our analysis by bringing alternative perspectives. Hence, the EAGLE model features a more detailed euro area and external block, GEAR includes a sound labour market, while the BE model has a financial block with borrowing constrains and long-term debt.[…] In addition, using the BE model, we can examine the specific role played by private deleveraging.
Their simulation results suggest that high debt economies:
- Can lose more output in a crisis;
- May spend more time at the zero lower bound;
- Are more heavily affected by spillover effects;
- Face a crowding out of private debt in the short and long run;
- Are adversely affected in terms of potential (long-term) output: to finance additional debt burden in the future they will have to use most distortionary type of taxation as they will be faced with large sovereign risk premia.
Economic consequences of high public debt: Evidence from three large scale DSGE models
Authors: Pablo Burriel, Cristina Checherita-Westphal, Pascal Jacquinot, Matthias Schön, Nikolai Stähler
From: Banco de España, ECB, Bundesbank
A low r-g environment might be short-term
As interest rate-growth differentials (r-g) have turned negative in many countries, now could be the time for governments to pursue fiscal expansions. However, the downside risks of such policies should not be disregarded. Using a large sample of economies, this column finds that high and increasing public debts, especially when denominated in foreign currencies, can lead to more volatile r-g dynamics. In particular, this is associated with higher probabilities of r-g reversals, tail risks, and an increased exposure to domestic and global shocks.
The risks of high public debt despite a low interest rate environment
By: Andrea Presbitero, Ursula Wiriadinata – IMF
