IMF Study on Debt Reduction: What It Says, What It Doesn’t

International Monetary Fund research concludes that countries should prioritize stimulus spending over debt reduction during times of economic stability. US politicians should not take this as a recommendation to continue deficit spending, suggest William G. Gale and Diane Lim for Brookings. The IMF model relies on two assumptions – that returns on infrastructure are greater than the market rate of returns and that there are few benefits to debt reduction except during times of fiscal crisis. In reality, the benefits of stimulus versus debt repayment should be decided on a case-by-case basis. The IMFs support of stimulus spending may overlook benefits of debt reduction. Other studies suggest that the IMF may overestimate the benefits of stimulus spending. ” A model’s usefulness hinges on the underlying assumptions, and the authors conclude, “the right answer to the question about debt repayment – obvious to any careful observer – is ‘it depends.’” – YaleGlobal

IMF Study on Debt Reduction: What It Says, What It Doesn't

IMF research analyzes when nations should pay down debt; Brookings analysts suggest decisions on debt, stimulus funding should be made on case-by- case basis
William G. Gale and Diane Lim
Wednesday, June 24, 2015

Bill Gale, the Arjay and Frances Miller Chair in Federal Economic Policy in the Economic Studies Program at Brookings, is an expert on tax policy, fiscal issues, pensions, and saving behavior. He is also co-director of the Tax Policy Center and director of the Retirement Security Project.

© 2015 The Brookings Institution

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