Primary Balance and Debt Dynamics: The Role of Interest Payments

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In this Focus, we revisit the impact of interest payments on the public debt dynamics with a focus on the Eurozone. As is well known, debt sustainability (in the sense of the stabilization of the debt‐to‐GDP ratio) depends crucially on the difference between interest payments that increase government debt and the nominal growth rate that reduces the debt‐to‐GDP ratio. Recently, this difference has turned negative in most advanced economies, including euro area sovereigns. Several recent empirical papers (see Jordà et al., 2017 and Mauro and Zhou, 2021) document that negative interest‐growth differentials occur for prolonged periods in history in both advanced and emerging economies. An important implication is that the debt‐to‐ GDP ratio can be stabilized or even decline without the government having to run a primary surplus. Some authors however (Mauro and Zhou, 2021; Debrun and Kinda, 2016) caution that growth and/or interest rate projections may be overoptimistic, thereby creating the illusion of a sustainable debt position, when the differential can quickly turn around, thus shutting countries out of financial markets


Pour une refonte du cadre budgétaire européen

Le cadre budgétaire européen est désormais obsolète face à la réalité post-Covid. Une refonte est indispensable