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Sovereign Debt Composition in Advanced Economies: A Historical Perspective

date Date: September 9, 2014
date Author(s): S. M. Ali Abbas, Laura Blattner, Mark Broeck, Asmaa El-Ganainy, Malin Hu
date Affiliation: IMF
Abstract

We examine how the composition of public
debt, broken down by currency, maturity, holder profile and marketability, has
responded to major debt accumulation and consolidation episodes during
1900-2011. Covering thirteen advanced economies, we focus on debt structure
shifts that occurred around the two World Wars and global economic downturns,
and the subsequent debt consolidations. Notwithstanding data gaps, we are able
to recover some broad common patterns. Episodes of large debt
accumulation—essentially, large increases in debt supply— were typically
absorbed by increases in short-term, foreign currency-denominated, and
banking-system-held debt. However, this pattern did not hold during the debt
build-ups starting in the 1980s and 1990s, which were compositionally skewed
toward long-term local-currency debt. We attribute this change to higher
structural demand for sovereign paper, linked to capital account liberalization
in advanced economies, the emergence of a large contractual saving sector, and
innovative sovereign debt products. With regard to debt consolidations, we find
support for the financial repression-cum-inflation channel for post World War II
debt reductions. However, the scope for a repeat of this strategy appears
limited unless financial liberalization and globalization were materially rolled
back or the current globally agreed monetary policy regime built around price
stability abandoned. Neither are significant favorable structural demand shifts,
as witnessed in the 1980s and 1990s, likely.

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