Reducing Public Debt: The Experience of Advanced Economies Over The Last 70 Years

Sofia Bernardini, Carlo Cottarelli, Giampaolo Galli, Carlo Valdes


This paper investigates the episodes of public debt reduction in advanced economies since the Second World War. We find 30 episodes of large reductions in the public debt-to-GDP ratio. Four main approaches succeeded in lowering the debt ratio. First, after the end of WWII, high and unexpected inflation eroded a large share of public debt. Second, during the Bretton Woods era, a mix of financial repression, high economic growth and moderate inflation helped reducing public debt. Third, since the 1980s, several advanced economies followed orthodox fiscal adjustments, namely improving their primary balance by reducing expenditure and/or raising taxes. The fourth approach (debt restructuring) was implemented only in one case: Greece in 2011-12. One key finding of our paper is that debt reduction has never been achieved by relaxing fiscal policy (cutting taxes or increasing expenditure), hoping that this would set in motion a growth process sufficiently strong to lower the debt ratio (the so-called “denominator approach” which has recently become fashionable in some countries, including Italy). The empirical evidence of the last 70 years suggests that running a sufficiently strong primary surplus is the only viable option to reduce the public debt ratio nowadays, particularly in countries that are part of the euro area.

Full Text:



Abbas, Ali S., Nazim Belhocine, Asmaa El-Ganainy, and Mark Horton, (2010), “A Historical Public Debt Database”, Working Paper 10/245, (Washington, D.C.: International Monetary Fund, November) (

Akitoby, Bernardin, Takuji Komatsuzaki, and Ariel Binder, (2014), “Inflation and Public Debt Reversals in the G7 Countries”, (Washington, D.C.: International Monetary Fund, June).

Alesina, Alberto, Carlo Favero, and Francesco Giavazzi, (2019), Austerity: When It Works And When It Doesn’t, (Princeton University Press).

Aloy, Marcel, Gilles Dufrénot, and Anne Péguin-Feissolle, (2014), “Is financial repression a solution to reduce fiscal vulnerability? The example of France since the end of World War II”, Applied Economics, 46(6), 629-637.

Ball, Laurence, Barry DeLong, and Larry H. Summers, (2014), “Fiscal policy and full employment”, Full Employment Project, (Washington, D.C.: Center on Budget and Policy Priorities, April).

Barro, Robert. J, (1979), “On the determination of the public debt”. Journal of Political Economy, 87(5, Part 1), 940-971.

Battilossi, Stefano, (2005), “The Second Reversal: The Ebb and Flow of Financial Development in Western Europe, 1950–1991.”, (Madrid: Department of Economic History and Institutions, Universidad Carlos III Madrid).

Berg, Andrew M., Rafael Portillo, Edward M. Buffie, Catherine A. Pattillo, and Luis F. Zanna, (2012), “Public investment, growth, and debt sustainability: Putting together the pieces”, Working Paper 12/144, (Washington, D.C.: International Monetary Fund, June).

Blanchard, Olivier J., and Larry H. Summers (1986), “Hysteresis and the European unemployment problem”, NBER Macroeconomics Annual, 1, 15-78, (Cambridge: MIT Press, Fall).

Blanchard, Olivier J., and Larry H. Summers (2017), “Rethinking Stabilization Policy. Back to the Future”, presented at the conference “Rethinking Macroeconomic Policy”, (Washington, D.C.: Peterson Institute, October).

Blinder, Alan S. (1982), “Issues in the Coordination of Monetary and Fiscal Policy”, NBER Working Papers 0982, (Cambridge: National Bureau of Economic Research, September).

Blinder, Alan. S., and Robert M. Solow, R. (1973), “Does fiscal policy matter?”, Journal of Public Economics, 2(4), 319-337.

Bofinger, Peter, Lars Feld, Wolfgang Franz, Christoph Schmidt, and Beatrice Weder di Mauro (2011), “A European Redemption Fund”, VoxEU, November ( european-redemption-fund).

Boyes, Roger, (2009), Meltdown Iceland: Lessons on the world financial crisis from a small bankrupt island, (New York: Bloomsbury Publishing USA).

Brown, Cary E., (1989), “Episodes in the Public Debt History of United States”, MIT Working Paper 540, October.

Calabrò, Andrea, (2011), “Partial Privatization and Public Services Accountability: Evidence from Italy and Norway”, in Governance Structures and Mechanisms in Public Service Organizations 67- 91, (Heidelberg: Physica-Verlag HD).

Casella, Alessandra, and Barry Eichengreen, (1991), “Halting inflation in Italy and France after World War II”, NBER Working Paper Series 3852, (Cambridge: National Bureau of Economic Research, September).

Cassese, Sabino, (2018), "Il “persistente alto livello del debito”:" the habits and mentality of the country"? in Gastaldi, Franco and Paolo Liberati, I nodi della finanza pubblica: teoria e politica, (Milano: Franco Angeli ed).

Ciampi, Carlo A., (16-09-2016), “Intervista a Arrigo Levi”, La Stampa ( lultima-intervista-di-ciampi-a-la-stampa-6q69C4cwXzabF5zdKFnp1J/pagina.html).

Cioffi, Marika, Pietro Rizza, Marzia Romanelli, and Pietro Tommasino, (2019), “Outline of a redistribution-free debt redemption fund for the euro area”, Occasional Papers 479, (Roma: Banca d’Italia).

Codogno, Lorenzo, and Giampaolo Galli, (2017), “Can fiscal discipline be counterproductive?”,

Economia Italiana, 1-2-3.

Corsetti, Giancarlo, Lars P. Feld, Philip R. Lane, Lucrezia Reichlin, Hélène Rey, Dimitri Vayanos, and Beatrice Weder di Mauro, (2015), “A New Start for the Eurozone: Dealing with Debt”, Monitoring the Eurozone 1, (London: CEPR Press, March).

Corsetti, Giancarlo, and Luca Dedola, (2016), "The mystery of the printing press: Monetary policy and self-fulfilling debt crises." Journal of the European Economic Association, 14(6), 1329-1371.

Cottarelli, Carlo, (2016), Il macigno: Perché il debito pubblico ci schiaccia e come si fa a liberarsene, (Milano: Feltrinelli Editore).

Cottarelli, Carlo, (2017), What we owe: truths, myths, and lies about public debt, (Washington DC: Brookings Institution Press).

Cottarelli, Carlo, Giampaolo Galli, Paolo Marullo Reedtz, and Giovanni Pittaluga, (1986), “Monetary Policy through Ceilings on Bank Lending”, Economic Policy, 1(3), 673-694.

Cottarelli, Carlo, and Laura. Jaramillo, (2012), “Walking hand in hand: Fiscal Policy and Growth in Advanced Countries”, IMF Working Paper, 12/137, (Washington DC: International Monetary Fund, May).

Cruces, Juan J., and Christoph Trebesch, (2013), "Sovereign defaults: The price of haircuts",

American Economic Journal: Macroeconomics, 5(3), 85-117.

DeLong, J. Bradford, and Larry H. Summers, (2012), “Fiscal policy in a depressed economy”,

Brookings Papers on Economic Activity, 1, 233-297.

Delors, Jacques, (1989), “Report on Economic and Monetary Union in the European Community”, (Brussels: Committee for the Study of Economic and Monetary Union).

Delpla, Jacques, and Jacob Von Weizsäcker, (2010), “The Blue Bond Proposal”, Bruegel Policy Brief, 3(6).

Eichengreen, Barry, and Albrecht Ritschl, (2009), "Understanding West German economic growth in the 1950s", Cliometrica 3(3), 191-219.

Eichengreen, Barry, and Ugo Panizza, (2016), "A surplus of ambition: can Europe rely on large primary surpluses to solve its debt problem?." Economic Policy 31(85), 5-49.

Escolano, Julio, (2010), A Practical Guide to Public Debt Dynamics, Fiscal Sustainability, and Cyclical Adjustment of Budgetary Aggregates, (Washington DC: International Monetary Fund, January).

Escolano, Julio, Anna Shabunina, and Jaejoon Woo, (2017), “The Puzzle of Persistently Negative Interest‐Rate–Growth Differentials: Financial Repression or Income Catch‐Up?” Fiscal

Studies, 38(2), 179-217.

Eyraud, Luc, and Anke Weber, (2013), “The Challenge of Debt Reduction during Fiscal Consolidation”, IMF Working Paper 13/67, (Washington DC: International Monetary Fund, March).

European Commission, AMECO database ( euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en).

European Investment Bank (

Fatás, Antonio, (2000), “Do business cycles cast long shadows? Short run persistence and economic growth”, Journal of Economic Growth, 5(2), 147-162.

Fatás, Antonio, and Larry H. Summers, (2016), “The permanent effects of fiscal consolidations”, NBER Working Papers 22374, (Cambridge: National Bureau of Economic Research, September).

Feige, Edgar L., and Robert T. McGee, (1982), “Supply-side economics and the unobserved economy: the Dutch Laffer curve”, Economisch-statistische Berichten.

Fiscal Monitor, International Monetary Fund. (

Furman, Jason, (2016), "The new view of fiscal policy and its application." VoxEU, November (

Galofré-Vilà, Gregory, Christopher M. Meissener, Martin Mckee M., and David Stuckler, (2018), “The economic consequences of the 1953 London Debt Agreement”, European Review of Economic History, 23(1), 1-29.

Gaspar, Vitor, Maurice Obstfeld, Ratna Sahay, and Douglas Laxton, (2016), “Macroeconomic Management When Policy Space is Constrained: The 3-C Approach to Economic Policy”, Staff Discussion Note 16/09, (Washington, D.C.: International Monetary Fund, September).

German Council of Economic Experts, (2011), “Assume responsibility for Europe”, Annual Report, 2011/12 (Wiesbaden).

Giavazzi, Francesco, and Marco Pagano, (1990), "Can severe fiscal contractions be expansionary? Tales of two small European countries." NBER macroeconomics annual 5, 75-111.

Gill, Indersmit S., and Martin Raiser, (2013). Golden growth: restoring the lustre of the European economic model (Vol. 3): Country benchmarks (English), Europe and Central Asia Studies, (Washington DC: World Bank).

Global Debt Database, International Monetary Fund (

Haavelmo, Trygve, (1945), “Multiplier effects of a balanced budget”, Econometrica: Journal of the Econometric Society, 311-318.

Historical Public Debt Database, International Monetary Fund. (

Hjerppe, Riitta, (1989), “The Finnish economy 1860-1985: Growth and structural change”, Bank of Finland Publications.

International Monetary Fund and World Bank, (2009), “Review of Some Aspects of the Low- Income Country Debt Sustainability Framework”, (IDA/SecM2009-0397; SM/09/216; BUFF/09/146).

International Monetary Fund, (2003), Guidelines for public debt management: Accompanying Documents and Selected Case Studies, (Washington, DC: International Monetary Fund and World Bank).

International Monetary Fund, (2011), “Fiscal Monitor: Addressing Fiscal Challenges to Reduce Economic Risks”, (Washington, DC: International Monetary Fund).

International Monetary Fund, (2015), “The Fund's Lending Framework and Sovereign Debt— Further Considerations”, (Washington, DC: International Monetary Fund).

International Monetary Fund (2016), “Greece, Preliminary Debt Sustainability analysis – Updated Estimates and further considerations”, Country Report No.16/130, (Washington, DC: International Monetary Fund).

Jordà, Òscar, Moritz Schularick, and Alan M. Taylor, (2017), “Macrofinancial History and the New Business Cycle Facts.” in NBER Macroeconomics Annual 2016, volume 31, edited by Martin Eichenbaum and Jonathan A. Parker, (Chicago: University of Chicago Press).

Knight, Robin, (2011), “Europe's Austerity Approach 'Clearly Wrong': Stiglitz”, CNBC


Laffer, Arthur B., (2004), "The Laffer curve: Past, present, and future." Backgrounder, 1765, 1176- 96.

Levac, Mylène, and Philip Wooldridge, (1997), “The fiscal impact of privatization in Canada.” Bank of Canada Review, 25-40.

Lippi, Francesco, and Fabiano Schivardi, (2014), “Le conseguenze di un ripudio. Del debito”,, May (

Longobardi, Ernesto, and Antonio Pedone, (2015), Alcune recenti proposte di ristrutturazione dei debiti sovrani nell’area dell’euro, (Mimeo, October).

Mauro, Paolo, (2011), Chipping away at public debt: Sources of failure and keys to success in fiscal adjustment. (London: John Wiley & Sons).

Mauro, Paolo, and Jan Zilinsky, (2016), “Reducing Government Debt ratios in an era of low growth”, Policy Brief 16-10, (Washington D.C.: The Peterson Institute for International Economics, July).

Megginson, William L., and Jeffry M. Netter, (2001), "From state to market: A survey of empirical studies on privatization." Journal of economic literature, 39(2), 321-389.

Myddelton, David. R., (2014), “The British approach to privatisation” Economic Affairs, 34(2), 129-138.

National sources, BIS Consumer price series (

Nuti, D. Mario, (2013), “Perverse fiscal consolidation”, in Conference on Economic and Political Crises in Europe and the United States: Prospects for Policy Cooperation, Trento, Italy, 7-9 November.

OECD, (2002), “Recent Privatisation Trends in OECD Countries”, Financial Market Trends No. 82, June.

OECD, (2005), Advances in Risk Management of Government Debt, (Paris: OECD Publishing).

OECD, (2009), “Privatisation in the 21st Century: Recent Experiences of OECD Countries, Report on Good Practices”, (Paris: OECD Publishing).

OECD, (2013), Sovereign Borrowing Outlook 2013, (Paris: OECD Publishing).

Oesterreichische National Bank for Austria ( Tables/Prices--Competitiveness/Consumer-Prices.html).

Ozer, Balfour, Shelly Reiss, and Yoav Soffer, (2005), “Israel’s Financial Account Liberalization”, Bank of Israel, Foreign Exchange Activity Department, August.

Papademos, Lucas, (2011), “Forcing Greek restructuring is not the answer”, Financial Times, October (

Parello, Carmelo. P., and Vincenzo Visco, (2012), “The European redemption fund: a comparison of two proposals”. Politica economica, 28(3), 273-306.

Paris, Pierre, and Charles Wyplosz, (2014), “PADRE: Politically Acceptable Debt Restructuring in the Eurozone”, Geneva Reports on the World Economy Special Report 3, ICMB and CEPR (

Pedone, Antonio, (2011), “Bilancio delle amministrazioni pubbliche, formazione e gestione del debito pubblico”, in Economia Italiana, 3, 583-643.

Privatization Barometer (

Prodi, Romano, and Alberto Quadrio Curzio (2011), “EuroUnionBond per la nuova Europa”, IlSole24Ore, August ( nuova-europa-201300.shtml?uuid=AapbbDyD).

Public Finance in Modern History, International Monetary Fund (

Reinhart, Carmen, and M. Belen Sbrancia, (2015), “The liquidation of government debt”. IMF Working Paper 15/7 (Washington D.C.: International Monetary Fund).

Reinhart, Carmen M., and Kenneth S. Rogoff, (2009), “The Aftermath of Financial Crises.” American Economic Review, 99(2): 466-472.

Reinhart, Carmen M., Vincent R. Reinhart, and Kenneth S. Rogoff, (2012), "Public Debt Overhangs: Advanced-Economy Episodes since 1800." Journal of Economic Perspectives, 26(3), 69-86.

Samuelson, Paul A., (1939), “Interactions between the multiplier analysis and the principle of acceleration”, The Review of Economics and Statistics, 21(2), 75-78.

Samuelson, Paul A., (1940), “The theory of pump-priming re-examined”, The American Economic Review, 492-506.

Skidelsky, Robert, and Nicolò Fraccaroli, (2017), Austerity vs Stimulus: The Political Future of Economic Recovery, (Springer).

Statistics Canada ( Statistics New Zealand (

Statistics Norway (

Tanzi, Vito, (1977), “Inflation, lags in collection, and the real value of tax revenue”, Staff Papers, 24(1), 154-167, (Washington D.C.: International Monetary Fund).

Toniolo, Gianni, (2013), The Oxford handbook of the Italian economy since unification, (New York: Oxford University Press).

Wheeler, Graeme, (2004). Sound Practice in Government Debt Management, (Washington, D.C.: The World Bank).

World Economic Outlook, International Monetary Fund (

Wyplosz, Charles, (2007), “Debt sustainability assessment the IMF approach and alternatives”, HEI Working Paper No: 03/2007, (Geneva: Graduate Institute of International Studies).

Yellen, Janet. L. (1989), “Symposium on the budget deficit”, Journal of Economic Perspectives, 3(2), 17-21.

Zamagni, Vera, (1998), "Il debito pubblico italiano 1861-1946: ricostruzione della serie storica." Rivista di storia economica, 14(3), 207-242.

Zeng, Li, (2014), “Determinants of the primary fiscal balance: evidence from a panel of countries”, in Carlo Cottarelli, Phil Gerson and Abdelhak Senhadji, Post crisis fiscal policy, (Cambridge: MIT Press).

Zettelmeyer, Jeromin, Christoph Trebesch, and Mitu Gulati, (2013), "The Greek debt restructuring: an autopsy." Economic Policy, 28(75), 513-563.

Zohlnhöfer, Reimut, and Herbert Obinger, (2006), "Selling off the" Family Silver": the politics of privatization." World Political Science, 2(1), article 2.


  • There are currently no refbacks.

Copyright (c) 2021 Giampaolo Galli

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.