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The Liquidation of Government Debt
June 15, 2011Washington, DC

Carmen M. Reinhart is the Minos A. Zombanakis Professor of the International Financial System at Harvard Kennedy School. Previously, she was the Dennis Weatherstone Senior Fellow at the Peterson Institute for International Economics and Professor of Economics and Director of the Center for International Economics at the University of Maryland. Professor Reinhart held positions as Chief Economist and Vice President at the investment bank Bear Stearns in the 1980s. She spent several years at the International Monetary Fund. Reinhart is a Research Associate at the National Bureau of Economic Research, and a member of the Congressional Budget Office Panel of Economic Advisers and the Economic Advisory Panel of the Federal Reserve Bank of New York. She has been listed among Bloomberg Markets Most Influential 50 in Finance.

Reinhart has written on a variety of topics in macroeconomics and international finance. She has served on numerous editorial boards and has testified before congress. Her work has helped to inform the understanding of financial crises for over a decade. Her best-selling book (with Kenneth S. Rogoff) entitled This Time is Different: Eight Centuries of Financial Folly documents the striking similarities of the recurring booms and busts that have characterized financial history and has been translated to over 20 languages and won the 2010 Paul A. Samuelson TIAA-CREF Institute Award, among others.

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of "financial repression." Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945–1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum). We describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era.

The Development Economics Vice Presidency (DEC) launched its lecture series in April 2005 to bring distinguished academics to the Bank to present and discuss new knowledge on development. The purpose of the Lecture Series is to introduce ideas on cutting edge research, challenge and contribute to the Bank's intellectual climate, and reexamine current development theories and practices. The Lectures revisit issues of long-standing concern and explore emerging issues that promise to be central to future development discourse. The Lecture Series reflects DEC’s commitment to intellectual leadership and openness in embracing future challenges to reduce poverty.

The DEC Lecture Series is chaired by Kaushik Basu, Senior Vice President and Chief Economist, and includes a presentation and floor discussion.

Lecture Details
  • Date: June 15, 2011 12:
  • Time: 12:30 PM – 2:00 PM
  • Venue: Preston Auditorium