factors behind the debt dynamics in EMDEs. To fill the gap of previous studies, we use a more comprehensive dataset covering 150 EMDEs for the period 1971–2018 and ask three interrelated questions: (1) what are the empirical regularities on the r-g and are there marked differences between EMEs and LIDCs?; (2) does the r-g play a debt stabilizing role and does it make a significant difference during the various phases of a fiscal crisis?; and (3) are other factors more important in explaining debt dynamics in EMDEs? Our starting point is the standard debt
. Abstract In the wake of the COVID-19 pandemic, debt levels in emerging and developing economies have surged raising concerns about fiscal sustainability. Historically, negative interest-growth differentials in these countries have played a debt-stabilizing role. But is this enough to prevent countries from falling into debt distress? Drawing from a sample of 150 emerging and developing economies going back to the 1970s, we find that interest-growth differentials have remained relatively low, dampening debt increases in the run up to a crisis. But in the face of
of financial development. However, even though a negative interest rate-growth differential should play a debt-stabilizing role, keeping debt stable even in the presence of persistent primary deficits, debt has increased strongly over the last years in the Caribbean region (see Chapter 2 ). This casts doubt on whether this mechanism was at play. Exceptional Fiscal Performance As a third measure, we look at a debt benchmark based on exceptional fiscal performance and compare it to the long-term debt benchmark as well as the natural debt limit. This