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The Motives to Borrow

Governments issue debt for good and bad reasons. While the good reasons—intertemporal taxsmoothing, fiscal stimulus, and asset management—can explain some of the increases in public debt observed in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing and budgetary institutions and fiscal rules can play a role in mitigating the tendency to overborrow. While it is difficult to establish a clear causal link from high public debt to low growth, it is likely that some countries might be paying a price in terms of lower growth and greater output volatility because of excessive debt accumulation. This document is an excerpt of the forthcoming book from Oxford University Press and the IMF that is designed to connect the multiple aspects of sovereign debt policy into one coherent text. For further information please go to our focus: Sovereign Debt: A Guide for Economists and Practitioners