Reinhart, Carmen M., and M. Belen Sbrancia. "The Liquidation of Government Debt." Economic Policy 30.82 (March 2015): 291-333.
High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression (FR), a tax on bondholders and savers via negative or below-market real interest rates. After World War II, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. FR is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative half of the time during 1945–80. Average annual interest expense savings for a 12-country sample range from about 1% to 5% of GDP for the full 1945–80 period. We suggest that, once again, FR may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.