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Mr. Thomas J Sargent, Mr. George Hall, Mr. Martin Ellison, Mr. Andrew Scott, Mr. Harold James, Ms. Era Dabla-Norris, Mark De Broeck, Mr. Nicolas End, Ms. Marina Marinkov, and Vitor Gaspar


World War I created a set of forces that affected the political arrangements and economies of all the countries involved. This period in global economic history between World War I and II offers rich material for studying international monetary and sovereign debt policies. Debt and Entanglements between the Wars focuses on the experiences of the United States, United Kingdom, four countries in the British Commonwealth (Australia, New Zealand, Canada, Newfoundland), France, Italy, Germany, and Japan, offering unique insights into how political and economic interests influenced alliances, defaults, and the unwinding of debts. The narratives presented show how the absence of effective international collaboration and resolution mechanisms inflicted damage on the global economy, with disastrous consequences.

Mr. Barry J. Eichengreen, Ms. Asmaa A ElGanainy, Rui Pedro Esteves, and Kris James Mitchener
We consider public debt from a long-term historical perspective, showing how the purposes for which governments borrow have evolved over time. Periods when debt-to-GDP ratios rose explosively as a result of wars, depressions and financial crises also have a long history. Many of these episodes resulted in debt-management problems resolved through debasements and restructurings. Less widely appreciated are successful debt consolidation episodes, instances in which governments inheriting heavy debts ran primary surpluses for long periods in order to reduce those burdens to sustainable levels. We analyze the economic and political circumstances that made these successful debt consolidation episodes possible.
Mariusz Jarmuzek and Rossen Rozenov
Nonfinancial private sector debt increased significantly in advanced economies prior to the global financial crisis and, with a few exceptions, deleveraging has been limited. Furthermore, in some countries households and corporations have continued to accumulate debt. Drawing on the literature, the paper aims to provide a quantitative assessment of the gaps between actual and sustainable levels of debt and to identify the key factors that drive excessive borrowing. Results suggest that variables that are typically found important in studies focusing on borrowing decisions, are also relevant for explaining the debt sustainability gaps.
Ruud A. de Mooij and Mr. Shafik Hebous
Tax provisions favoring corporate debt over equity finance (“debt bias”) are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today’s rules) have no significant impact on debt bias—which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.
International Monetary Fund. European Dept.
This paper discusses Albania’s Eighth Review Under the Extended Arrangement and Request for Modification of Performance Criteria . All performance criteria at the end of April 2016 were met with comfortable margins, and good progress has been made on the structural reform agenda. The economic recovery is strengthening, supported by large energy-related investments and a gradual recovery in domestic demand. The current account deficit is widening owing to import-intensive foreign direct investment. Inflation is recovering from very low levels, although underlying inflation pressure remains weak. The IMF staff supports the completion of the Eighth Review under the Extended Arrangement.