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Chapter 3: Coming Down to Earth: How to Tackle Soaring Public Debt

Public debt as a ratio to GDP soared across the world during COVID-19 and is expected to remain elevated, posing a growing challenge for policymakers, particularly as real interest rates are rising across the world. Chapter 3 examines the effectiveness of different approaches to reducing debt-to-GDP ratios. Based on econometric analyses and complemented with a review of historical experiences, the chapter reaches three main conclusions. First, adequately timed and appropriately designed fiscal consolidations have a high probability of durably reducing debt ratios. Second, when a country is in debt distress, a comprehensive approach that combines significant debt restructuring—renegotiation of terms of servicing of existing debt—fiscal consolidation, and policies to support economic growth can have a significant and long-lasting impact on reducing debt ratios. Coordination among creditors is essential. Finally, economic growth and inflation have historically contributed to reducing debt ratios.

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