Is higher government debt more risky?


Is higher government debt more risky?

On balance, the historical basis for austerity is not as robust or as fragile as proponents or detractors claim.

Economic Analysis

22 February 2013

 

While the frequency of default at higher debt levels is raised, history suggests that on average we go from a once in 333 year frequency to a once in 125 year frequency. This latter still represents a rare event.

There is no evidence that high debt/GDP means a higher risk of high or hyperinflation. Further there is little evidence of a systematic relationship between high debt and high real interest rates. As we are currently seeing, countries like the UK and US are enjoying lower rates than ever, even as debt goes up.

Perhaps the most important part of the debate seems a long way from a convincing resolution. The case for or against the impact of high debt on growth is yet to be convincingly made. In committing to one view over the other, both sides of the debate will be operating under considerable uncertainty.

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