American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
When Interest Rates Go Low, Should Public Debt Go High?
American Economic Journal: Macroeconomics
vol. 16,
no. 4, October 2024
(pp. 432–69)
Abstract
Is deficit finance free when real borrowing rates are routinely lower than growth rates? Specifically, can the government make all generations better off by perpetually taking from the young and giving to the old? We study this in stochastic closed- and open-economy OLG models. Unfortunately, Pareto gains are predicted only for implausible calibrations. Even then, the gains reflect improved intergenerational risk sharing, improved international risk sharing, and beggaring thy neighbor—not intergenerational redistribution, per se. As we show, theoretically and quantitatively, low government borrowing rates suggest state-contingent bilateral transfers between generations—not unconditional, unilateral redistribution from future to current generations.Citation
Brumm, Johannes, Xiangyu Feng, Laurence Kotlikoff, and Felix Kubler. 2024. "When Interest Rates Go Low, Should Public Debt Go High?" American Economic Journal: Macroeconomics, 16 (4): 432–69. DOI: 10.1257/mac.20230154Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E62 Fiscal Policy
- F41 Open Economy Macroeconomics
- H55 Social Security and Public Pensions
- H63 National Debt; Debt Management; Sovereign Debt
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