Replication data for: Public Debt and Low Interest Rates
Principal Investigator(s): View help for Principal Investigator(s) Olivier Blanchard
Version: View help for Version V1
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2019Pres_data | 10/11/2019 10:55:PM | ||
LICENSE.txt | text/plain | 14.6 KB | 10/11/2019 06:55:PM |
Project Citation:
Blanchard, Olivier. Replication data for: Public Debt and Low Interest Rates. Nashville, TN: American Economic Association [publisher], 2019. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2019-10-11. https://doi.org/10.3886/E112856V1
Project Description
Summary:
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This lecture focuses on the costs of public debt when safe interest rates are low. I develop four main arguments. First, I show that the current US situation, in which safe
interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception. If the future is like the past, this implies that debt
rollovers, that is the issuance of debt without a later increase in taxes, may well be feasible. Put bluntly, public debt may have no fiscal cost. Second, even in the absence
of fiscal costs, public debt reduces capital accumulation, and may therefore have welfare costs. I show that welfare costs may be smaller than typically assumed. The
reason is that the safe rate is the risk-adjusted rate of return to capital. If it is lower than the growth rate, it indicates that the risk-adjusted rate of return to capital is in
fact low. The average risky rate however also plays a role. I show how both the average risky rate and the average safe rate determine welfare outcomes. Third, I look at
the evidence on the average risky rate, i.e., the average marginal product of capital. While the measured rate of earnings has been and is still quite high, the evidence
from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for
debt: the lower the marginal product, the lower the welfare cost of debt. Fourth, I discuss a number of arguments against high public debt, and in particular the existence
of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky. This is a
very relevant argument, but it does not have straightforward implications for the appropriate level of debt. My purpose in the lecture is not to argue for more public debt,
especially in the current political environment. It is to have a richer discussion of the costs of debt and of fiscal policy than is currently the case.
Scope of Project
JEL Classification:
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E22 Investment; Capital; Intangible Capital; Capacity
E23 Macroeconomics: Production
E43 Interest Rates: Determination, Term Structure, and Effects
E62 Fiscal Policy
H63 National Debt; Debt Management; Sovereign Debt
E22 Investment; Capital; Intangible Capital; Capacity
E23 Macroeconomics: Production
E43 Interest Rates: Determination, Term Structure, and Effects
E62 Fiscal Policy
H63 National Debt; Debt Management; Sovereign Debt
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