Easy does it
Monetary policy is the secret ingredient to bringing down debt ratios
Sep 29th 2012 | from the print edition

..POLITICIANS across the rich world are quarrelling over how to deal with public debt. Yet the most important actors in the drama may be unelected central bankers, according to a study by the International Monetary Fund, published in its latest economic outlook. The IMF looked at 26 episodes since 1875 when debt topped 100% of GDP, to determine how those ratios got back down.

Growth, spending cuts and tax increases did their bit, but the make-or-break factor was monetary policy. Low or falling nominal interest rates and inflation were crucial to reducing the debt-to-GDP ratio. When interest rates were high and deflation rife, consolidation failed. This is mildly positive news for America and Britain, whose central banks are determined to keep monetary policy easy as austerity bites. But it suggests a bleak future for countries locked into the monetary straitjacket of the euro, in the absence of easier monetary policy by the European Central Bank.