Optimal Fiscal Policy with Low Interest Rates for Government Debt

2021 ◽  
pp. 104210
Author(s):  
Philipp Pfeiffer ◽  
Werner Roeger ◽  
Lukas Vogel
Keyword(s):  
Fiscal Policy ◽  
Interest Rates ◽  
Government Debt ◽  
Low Interest Rates ◽  
Optimal Fiscal Policy

scholarly journals The Impact of Government Debt Issuance on Short-Term interest rates in Indonesia

2009 ◽  
Vol 11 (3) ◽  
pp. 301
Author(s):  
Sri Adiningsih
Keyword(s):  
Fiscal Policy ◽  
Private Sector ◽  
Financial Markets ◽  
Interest Rates ◽  
Budget Deficit ◽  
Negative Impact ◽  
Government Debt ◽  
Crowding Out ◽  
Short Term ◽  
The Impact

This paper analyzes whether the expansionary fiscal policy funded by issuing debt instruments in financial markets will increase short-term interest rates. If  the expansionary fiscal policy increases interest rates, which decrease private spending especially investment, crowding out occurs. This is interesting because global economic crisis has encouraged many countries to run large budget deficits to stimulate the economy. Indonesia has also run budget deficit during this crisis and even in years before. The impact of such a policy can be significant because Indonesia’s debt market is still narrow and shallow. Therefore, its capability of absorbing the government debt instruments without influencing the private sector funding is limited. This study tests whether the crowding out occurs in Indonesia using a time series econometric model inspired by Cebula and Cuellar’s model. The Cointegration Regression and Error Correction Model (ECM) are used in this study. Monthly data from April 2000 to December 2008 are used for overnight real interbank call money interest rates, real net government bond issues in trading, real narrow money supply, real rate of one-month Certificate of Bank Indonesia, growth of Gross Domestic Product, and real net international capital flows. This empirical study shows that the crowding out problem occurred in Indonesia during the period. This indicates that financing budget deficit in Indonesia by issuing debt instruments in the financial markets has a negative impact on the private sector.

scholarly journals Activist Fiscal Policy

2010 ◽  
Vol 24 (4) ◽  
pp. 141-164 ◽  
Author(s):  
Alan J Auerbach ◽  
William G Gale ◽  
Benjamin H Harris
Keyword(s):  
Fiscal Policy ◽  
Interest Rates ◽  
Great Recession ◽  
Economic Conditions ◽  
Fiscal Policies ◽  
The Great Recession ◽  
Policy Interventions ◽  
Low Interest Rates ◽  
The Many ◽  
Monetary And Fiscal Policy

During and after the “Great Recession” that began in December 2007 the U.S. federal government enacted several rounds of activist fiscal policy. In this paper, we review the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy. Although fiscal interventions aimed at stimulating and stabilizing the economy have returned to common use, their efficacy remains controversial. We review the debate about the traditional types of fiscal policy interventions, such as broad-based tax cuts and spending increases, as well as more targeted policies. While there have been improvements in estimates of the effects of broad-based policies, much of what has been learned recently concerns how such multipliers might vary with respect to economic conditions, such as the credit market disruptions and very low interest rates that were central features of the Great Recession. The eclectic and innovative interventions by the Federal Reserve and other central banks during this period highlight the imprecise divisions between monetary and fiscal policy and the many channels through which fiscal policies can be implemented.

scholarly journals Government Spending Effects in a Policy Constrained Environment

2020 ◽  
Vol 20 (91) ◽  
Author(s):  
Ruoyun Mao ◽  
Shu-Chun Susan Yang
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rates ◽  
Government Spending ◽  
New Keynesian ◽  
Policy Uncertainty ◽  
Policy Regimes ◽  
Keynesian Model ◽  
Low Interest Rates ◽  
Rate Environment

The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates.

scholarly journals Fiscal Austerity in Ambiguous Times

2019 ◽  
Vol 11 (1) ◽  
pp. 89-131
Author(s):  
Axelle Ferriere ◽  
Anastasios G. Karantounias
Keyword(s):  
Fiscal Policy ◽  
Interest Rates ◽  
Public Debt ◽  
Optimal Policy ◽  
Government Spending ◽  
Ambiguity Aversion ◽  
Elasticity Of Substitution ◽  
Long Run ◽  
Optimal Fiscal Policy ◽  
Fiscal Austerity

This paper analyzes optimal fiscal policy with ambiguity aversion and endogenous government spending. We show that without ambiguity, optimal surplus-to-output ratios are acyclical and that there is no rationale for either reduction or further accumulation of public debt. In contrast, ambiguity about the cycle can generate optimally policies that resemble “austerity” measures. Optimal policy prescribes higher taxes in adverse times and front-loaded fiscal consolidations that lead to a balanced primary budget in the long run. This is the case when interest rates are sufficiently responsive to cyclical shocks, that is, when the intertemporal elasticity of substitution is sufficiently low. (JEL D81, E32, E43, E62, H21, H61, H63)

scholarly journals Fiscal sustainability and low interest rates: what an indicator can(’t) tell

Empirica ◽  
2021 ◽  
Author(s):  
Martin Werding
Keyword(s):  
Growth Rate ◽  
Fiscal Policy ◽  
Interest Rates ◽  
Fiscal Sustainability ◽  
Demographic Ageing ◽  
Eu Member States ◽  
Low Interest Rates ◽  
Ministry Of Finance ◽  
Sustainability Report

AbstractThe indicator that is commonly used to assess the long-term fiscal sustainability of public finances in EU member states (“S2”) is also defined if government borrowing rates are assumed to be permanently lower than the growth rate of GDP. Under these circumstances, however, it no longer provides a reliable orientation for fiscal policy. I illustrate these findings based on simulations prepared for the Fifth Sustainability Report published by the German Federal Ministry of Finance. In addition, I discuss the interpretation of the indicator in a low-interest environment and the assumption that relevant interest rates may continue to be low if there are substantial challenges for fiscal sustainability, e.g., through demographic ageing.

scholarly journals Wyzwania polityki fiskalnej dla państw Unii Europejskiej w dobie pandemii COVID-19

Studia BAS ◽  
2021 ◽  
Vol 3 (67) ◽  
pp. 117-132
Author(s):  
Anna Wildowicz-Szumarska
Keyword(s):  
Public Finance ◽  
Fiscal Policy ◽  
Interest Rates ◽  
Current Knowledge ◽  
Policy Instruments ◽  
Point Of View ◽  
Low Interest Rates ◽  
Crisis Conditions ◽  
The Empirical Analysis

The aim of the article is to explore the size and the structure of fiscal packages, implemented in response to the crisis caused by COVID-19, from the point of view of their impact on the security and stability of public finance. The first section provides an overview of the economic theory on the role of fiscal policy, including the causes of fiscal intervention. Next, difficulties in conducting fiscal policy under the conditions of pandemic are presented. In addition, fiscal instruments and their size are analysed in the context of their influence on budget results. In conclusion, it is claimed that fiscal packages should be temporary and targeted in order not to create a permanent burden on public finance, ensuring budget neutrality in the medium term. The empirical analysis expands the current knowledge on potential effects of fiscal policy implemented under the crisis conditions and low interest rates, when macroeconomic stabilisation can only be ensured through fiscal policy instruments, despite the accompanying fiscal costs related to the increase in public debt.

Managing the Risks of Negative Interest Rates

2021 ◽  
Vol 16 (3) ◽  
pp. 4-8
Author(s):  
Ioannis Akkizidis ◽  
Keyword(s):  
Interest Rates ◽  
Global Financial Crisis ◽  
Great Majority ◽  
Government Debt ◽  
Interest Rate Risk ◽  
Loss Analysis ◽  
Long Run ◽  
Negative Interest Rates ◽  
Low Interest Rates ◽  
The Global Financial Crisis

The acceleration in the issuance of government debt since the global financial crisis has led central bankers to engineer interest rates that are historically low in nominal terms and consistently lower than inflation rates. Although the ostensible aim of this policy is to stimulate economic growth, maintaining negative real rates also goes a long way so that government debt is manageable and will decline in the long run, relative to the size of the economy. Financial institutions hold the great majority of government debt, and their books of retail and corporate loans are expanding briskly at a time when ultra-low interest rates make borrowing especially attractive. Rates paid on deposits are low, in advanced economies, even negative in the euro zone in nominal terms. That helps to offset the reduction in income that banks earn on their lending. Even so, the extreme and unique conditions resulting from persistent negative real interest rates mean that banks must take particular care to manage their interest-rate risk in the context of other risk types and the banks’ profit-and-loss analysis.

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