After years of heated debate, the academic literature has seriously questioned whether the level of public debt matters to economic growth or to early warning indicators of potential crisis. Nevertheless, the International Monetary Fund (IMF), in its lending and surveillance activities, has a central, although appropriately nuanced, place for the level of public debt relative to GDP in its analysis. The IMF has sound reasons for its approach to the debt level, but the difference in perspective vis-à-vis the academic literature is striking. The IMF would do well to bring its targets (at least over the medium to long term) for the level of debt for crisis countries in line with its thresholds for safe debt levels in non-crisis countries. This would require formulating policies for fiscal, monetary, structural and debt restructuring policies around these targets.
Susan Schadler is a CIGI Senior Fellow. She is a former deputy director of the International Monetary Fund’s European Department. Her research interests include the sovereign debt crisis, global capital flows, global financial institutions and growth models for emerging market economies.