many studies.<sup>2</sup> EMDE borrowing costs tend to rise sharply during these episodes, and higher debt servicing costs can cause debt dynamics to deteriorate rapidly.

The current environment of low interest rates and persistently low inflation in advanced economies alleviates some risks associated with the post-crisis debt buildup. Policy interest rates in many advanced economies are near historical lows after major central banks recently reverted to an easing stance after winding down tightening cycles in 2018. Moreover, monetary policy in advanced economies is likely to be accommodative for the foreseeable future as growth prospects and inflation expectations remain subdued (Figure 4). This is reflected in low policy interest rate expectations in 2020-22. In EMDEs, many of which face slowing demand growth, subdued prices for their commodity exports, and disinflationary pressures, policymakers may also cut policy rates further in the near term.

Structural headwinds also seem likely to keep real interest rates low in the longer term. Estimates of the neutral interest rate, the rate consistent with stable inflation and an economy operating at full capacity, have declined markedly across advanced economies over the past decades (Holston, Laubach, and Williams 2017). The structural factors responsible for this decline are likely to persist. These include slowing labor force growth, a product of population aging and declining birth rates; slowing productivity growth since the most recent peak in the late 1990s; and muted prospects for a productivity revival (Eggertsson, Mehrotra, and Robbins 2019; Fernald 2016; Gordon 2012). An increased demand for safe assets, driven in part by the quantitative easing by central banks in major advanced economies and decreased appetite for capital investments also seem likely to continue weighing on interest rates (Del Negro et al. 2017; Rachel and Summers 2019; Williams 2018).

Low global interest rates have encouraged an aggressive search for yield, bouts of large capital flows to EMDEs, and a sharp narrowing of bond spreads. Around one-quarter of sovereign and corporate bonds issued in advanced economies—and some euro denominated bonds issued by Poland and Hungary—currently trade at negative yields.<sup>3</sup> Negative yields on advanced-economy debt already helped compress debt service burdens for EMDE borrowers and nudged debt toward a declining path in the future. Thus, interest payments on EMDE government debt fell from an average of 2.6 percent of GDP in 2000-07, to 1.6 percent of GDP in 2010-18, despite the increase in debt over that period.

The debate on the implications of low interest rates for additional debt accumulation has focused on advanced economies.<sup>4</sup> Some have argued that advanced economies, especially

> 2 See, for example, Claessens and Kose (2014), Frankel and Rose (1996), Kaminsky and Reinhart (2000, 2001), and Summers (2001) for the sources of financial crises.

> 3 In the two EMDEs with recent negative yielding sovereign bond issuances, government, household and corporate debt have risen only moderately over the past decade. Spreads on emerging market debt both for corporate and sovereign bonds reached all-time lows in 2017, boosting borrowing. Average spreads on corporate bonds have fallen from pre-crisis levels for all EMDEs, including LICs, as well as for lower rated corporate bonds.

> 4 Blanchard (2019), Blanchard and Summers (2019), Furman and Summers (2019), Krugman (2019), and Rachel and Summers (2019) discuss reasons for additional government spending financed by borrowing in advanced economies, and the United States in particular, whereas Alcidi and Gros (2019), Auerbach, Gale, and Krupkin (2019), CRFB (2019), Eichengreen (2019), Mazza (2019), Riedl (2019), Rogoff (2019), and Wyplosz (2019) caution against adding to debt, citing in particular the example of the United States.

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