Rising Government Debt: Causes and Solutions for a Decades-Old Trend

Pierre Yared

Journal of Economic Perspectives, 2019, vol. 33, issue 2, 115-40

Abstract: Over the past four decades, government debt as a fraction of GDP has been on an upward trajectory in advanced economies, approaching levels not reached since World War II. While normative macroeconomic theories can explain the increase in the level of debt in certain periods as a response to macroeconomic shocks, they cannot explain the broad-based long-run trend in debt accumulation. In contrast, political economy theories can explain the long-run trend as resulting from an aging population, rising political polarization, and rising electoral uncertainty across advanced economies. These theories emphasize the time-inconsistency in government policymaking, and thus the need for fiscal rules that restrict policymakers. Fiscal rules trade off commitment to not overspend and flexibility to react to shocks. This tradeoff guides design features of optimal rules, such as information dependence, enforcement, cross-country coordination, escape clauses, and instrument versus target criteria.

JEL-codes: D72 E23 E32 E62 H20 H50 H63 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/jep.33.2.115
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Citations: View citations in EconPapers (93)

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Working Paper: Rising Government Debt: Causes and Solutions for a Decades-Old Trend (2018)
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