Reinhart and Rogoff- The Forgotten History of Domestic Debt

I found this paper this morning.  Right now, I am gathering ideas to really grasp the issue of public debt and its challenges.  It can be challenging to divorce yourself from the sensational topics sold by our media, our politicians, and really dig into the issues surrounding a topic.  It can be a thankless job, and, for many, dismissed rather easily for those who have light knowledge on a subject.  It is too bad.  Knowledge of a subject eases the mind and allows for productive discourse.

Enjoy the archeology of economic data…

Abstract:There is a rich scholarly literature on sovereign default on external debt. Comparatively little is known about sovereign default on domestic debt. Even today, cross-country data on domestic public debt remains curiously exotic, particularly prior to the 1980s.  We have filled this gap in the literature by compiling a database on central government public debt (external and domestic).  The data span 1914 to 2010 for most countries, reaching back into the nineteenth century (and earlier) for many.  Our findings here on debt sustainability, sovereign defaults, the temptation to inflate, and the hierarchy of creditors only scratch the surface of what the domestic public debt data can reveal.  First, domestic debt is big—for the 64 countries for which we have long time series, domestic debt accounts for almost two-thirds of total public debt.  For most of the sample, this debt carries a market-determined interest rate (except for the financial repression era between WWII and financial liberalization).  Second, the data go a long way toward explaining the puzzle of why countries so often default on their external debts at seemingly low debt thresholds.  Third, domestic debt has largely been ignored in the vast empirical work on inflation.  In fact, domestic debt (a significant portion of which is long term and non indexed) is often much larger than the monetary base in the run-up to high-inflation episodes.  Last, the widely held view that domestic residents are strictly junior to external creditors does not find broad support.” , Carmen M. Reinhart, University of Maryland, and Kenneth S. Rogoff, Harvard University.


About Christopher Hessenflow

Christopher Hessenflow is a financial planner in the Chicago area. He works with all sorts of people who are much more interesting than he is. He enjoys his career which lends him time to think and, sometimes, be creative. Chip was born bald.
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