The Role of Growth Slowdowns and Forecast Errors in Public Debt Crises

This chapter presents the simple arithmetic of the relationship between growth slowdowns and debt. This arithmetic indicates an important role for growth in past debt crises in the developing world (HIPC and Latin America in particular), in the Eurozone, and the United States more recently. It shows that when growth forecasts and fiscal policy do not adjust to growth slowdowns, the result is often large forecast errors and budget deficits.