Abstract
The COVID-19 pandemic has triggered a massive increase in global debt levels and exacerbated the trade-offs between the benefits and costs of accumulating government debt. This paper examines these trade-offs by putting the recent debt boom into a historical context. It reports three major findings. First, during the 2020 global recession, both global government and private debt levels rose to record highs, and at their fastest single-year pace, in five decades. Second, the debt-financed, massive fiscal support programs implemented during the pandemic supported activity and illustrated the benefits of accumulating debt. However, as the recovery gains traction, the balance of benefits and costs of debt accumulation could increasingly tilt toward costs. Third, more than two-thirds of emerging market and developing economies are currently in government debt booms. On average, the current booms have already lasted three years longer, and are accompanied by a considerably larger fiscal deterioration, than earlier booms. About half of the earlier debt booms were associated with financial crises in emerging market and developing economies.
Highlights
The COVID-19 pandemic has triggered a massive increase in global debt levels as governments needed to finance the necessary spending to keep economies afloat
In emerging market and developing economies (EMDEs), these purchases were limited in scale (World Bank 2021); in advanced economies, the share of central bank holdings of government debt rose by 6 percentage points in 2020
In light of potential costs associated with rapid debt accumulation, the debt buildup over the past decade had raised concerns about its sustainability and the possibility of a financial crisis
Summary
The COVID-19 pandemic has triggered a massive increase in global debt levels as governments needed to finance the necessary spending to keep economies afloat. This paper examines the benefits and costs of debt accumulation by putting the recent debt boom into a historical context. The recent fiscal deterioration in advanced economies and EMDEs stands apart in the experience of the past half-century. Both global government and private debt levels have risen to their highest levels, and at their fastest single-year pace, in five decades. The third contribution of this paper is to illustrate the unique features of the ongoing debt booms in comparison with earlier episodes and the sheer scale of the fiscal deterioration since the pandemic, which dwarfs the experience during previous debt accumulation episodes.
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