KEYNES, PUBLIC DEBT, AND THE COMPLEX OF INTEREST RATES

2018 ◽  
Vol 40 (4) ◽  
pp. 493-512 ◽  
Author(s):  
Tony Aspromourgos
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Public Debt ◽  
Public Investment ◽  
Private Investment ◽  
Policy Management ◽  
John Maynard Keynes ◽  
Private Saving ◽  
Debt Market

John Maynard Keynes consistently offered qualified endorsement of Abba Lerner’s “functional finance” doctrine—the qualifications particularly turning on Keynes’s attentiveness to policy management of the psychology of the debt market. This article examines Keynes’s understanding of the possible influence of public debt on interest rates, from 1930 forward. With the multiplier a mechanism whereby debt-financed public investment generates matching private saving (net of private investment) plus public saving, it becomes possible for Keynes to conclude that increasing public debt need not place upward pressure on the level of interest rates, so long as policy can successfully manage the psychology of the debt market. This particularly concerns long interest rates and hence the term structure of rates. His theory of the term structure enables Keynes’s conviction that policy can manage and shape long rates. The conclusion considers also whether Keynes’s caution concerning public debt and interest rates retains relevance today.

scholarly journals Journal of the History of Economic Thought Preprints - Keynes, Public Debt and the Complex of Interest Rates

2018 ◽  
Author(s):  
Anthony Aspromourgos
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Public Debt ◽  
Public Investment ◽  
Private Investment ◽  
Economic Thought ◽  
History Of Economic Thought ◽  
John Maynard Keynes ◽  
History Of ◽  
Debt Market

John Maynard Keynes consistently offered qualified endorsement of Abba Lerner’s “functional finance” doctrine – the qualifications particularly turning on Keynes’s attentiveness to policy management of the psychology of the debt market. This article examines Keynes’s understanding of the possible influence of public debt on interest rates, from 1930 forward. With the multiplier a mechanism whereby debt-financed public investment generates matching private saving (net of private investment) plus public saving, it becomes possible for Keynes to conclude that increasing public debt need not place upward pressure on the level of interest rates, so long as policy can successfully manage the psychology of the debt market. This particularly concerns long interest rates and hence, the term structure of rates. His theory of the term structure enables Keynes’s conviction that policy can manage and shape long rates. The conclusion considers also whether Keynes’s caution concerning public debt and interest rates retains relevance today.

scholarly journals Impact of Public Debt, Deficit and Debt Financing on Private Investment in a Large Country: Evidence from the United States

2020 ◽  
Vol 6 (2) ◽  
pp. 139-161
Author(s):  
Amir Kia
Keyword(s):  
Public Debt ◽  
Public Investment ◽  
Government Expenditure ◽  
Private Investment ◽  
Adjustment Costs ◽  
The United States ◽  
Direct Impact ◽  
Large Country ◽  
Long Run ◽  
Short Run

This paper analyses the direct impact of fiscal variables on private investment. The current literature ignores one or more fiscal variables and, in many cases, the foreign financing of debt. In this paper, an aggregate investment function for an economy in which firms incur adjustment costs in their investment process is developed. The developed model incorporates the direct impact of government expenditure, public debt and investment, deficits and foreign-financed debt on private investment. The model is tested on US data. It is found that public investment does not have any impact on private investment, but government expenditure, deficit, debt and foreign-financed debt crowd out private investment over the long run. However, deficit crowds in the private investment over the short run.

scholarly journals Accounting for Low Long-Term Interest Rates: Evidence from Canada

2020 ◽  
pp. 1.000-72.000
Author(s):  
Jens H. E. Christensen ◽  
◽  
Glenn D. Rudebusch ◽  
Patrick J. Shultz ◽  
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Inflation Expectations ◽  
Real Rate ◽  
Inflation Risk ◽  
Risk Premiums ◽  
Term Structure Model ◽  
Sovereign Credit Risk ◽  
Debt Market

In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term inflation expectations have edged down, and real bond and inflation risk premiums have fluctuated but shown little longer-run trend. Therefore, the drop in the equilibrium real rate appears largely to account for the lower new normal in interest rates.

scholarly journals Are Large Deficits and Debt Dangerous?

2020 ◽  
Vol 110 ◽  
pp. 145-148
Author(s):  
Michael J. Boskin
Keyword(s):  
Financial Crisis ◽  
Interest Rates ◽  
Public Investment ◽  
Private Investment ◽  
Traditional View ◽  
Early Recovery ◽  
Present Evidence ◽  
Long Run ◽  
Tax Smoothing ◽  
Future Income

The traditional view of large deficits and debt is that they are harmful, save in recession/early recovery, for tax smoothing or to fund productive public investment, as they crowd out private investment and lower future income, and taken to extremes, can cause inflation, even a financial crisis. Blanchard (2019) concludes they may have no fiscal cost and increase welfare. I present evidence of a debt problem, policies necessary to contain it, effects on recovery, interest rates, and long-run growth. There are several serious issues with Blanchard's reading of key data and modeling assumptions, the changing of which would reverse his conclusions.

scholarly journals The Effect Of Government Debt Quantity Shocks On The Term Structure Of Interest Rates

2011 ◽  
Vol 5 (1) ◽  
Author(s):  
Riza Emekter ◽  
John Geppert ◽  
Benjamas Jirasakuldech
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Method Of Moments ◽  
Public Debt ◽  
Generalized Method Of Moments ◽  
Government Debt ◽  
Font Size ◽  
Yield Model ◽  
The Relationship

<p class="MsoBodyTextIndent" style="text-align: justify; line-height: normal; margin: 0in 35.2pt 0pt 35pt;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">In this paper, the effect of the maturity composition of marketable public debt on the term structure of interest rate is explored.<span style="mso-spacerun: yes;">&nbsp; </span>The research has shown that this effect is relatively small.<span style="mso-spacerun: yes;">&nbsp; </span>Unlike previous research, the yield changes around the quantity shocks are analyzed in relation to these shocks.<span style="mso-spacerun: yes;">&nbsp; </span>Our results show that yields respond significantly to the auctioning of new bonds.<span style="mso-spacerun: yes;">&nbsp; </span>The announcements of auctions do not have any impact on yields.<span style="mso-spacerun: yes;">&nbsp; </span>A two-factor affine yield model is used to explain the relationship between quantity shocks in public debt and term structure of interest rates.<span style="mso-spacerun: yes;">&nbsp; </span>The parameters are estimated using Generalized Method of Moments.<span style="mso-spacerun: yes;">&nbsp; </span>While the relationship between quantities and yields is weak, yields can be related to the event of the auctioning process.</span></span></span></p>

Public investment efficiency and monetary policy consequences: The case of investment ratio enhancing policy in Russia

2020 ◽  
pp. 22-39
Author(s):  
S. A. Vlasov ◽  
A. A. Sinyakov
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Equilibrium Model ◽  
Public Investment ◽  
Private Investment ◽  
Gdp Growth ◽  
Investment Efficiency ◽  
Investment Rate ◽  
Russian Economy ◽  
Key Features

The article analyzes the effects of measures to raise the investment rate from 21% to 25% of GDP up to 2024 on GDP growth and monetary policy. We conduct the analysis using an econometric general equilibrium model that reflects key features of the Russian economy. Achieving the target sequentially implies adding about 14 p. p. of GDP of public and/or private investment over 2019—2024 compared to the unchanged investment rate scenario. We find raising private investment to be the most efficient for stimulating GDP growth up to 2024. Among sources of public investment funding, using the sovereign wealth fund gives the highest GDP growth up to 2024. Nevertheless, given low public investment efficiency, a significant fraction of GDP growth becomes inflationary in this case. If the central bank minimizes the risk of inflation, inefficient public investment can lead the economy to equilibrium with higher private interest rates.

scholarly journals The Reaction of Private Spending and Market Interest Rates to the Changes in Public Spending

2016 ◽  
Vol 8 (1) ◽  
pp. 203-210
Author(s):  
Grzegorz Przekota ◽  
Agnieszka Lisowska
Keyword(s):  
Interest Rates ◽  
Public Debt ◽  
Budget Deficit ◽  
Public Spending ◽  
Private Investment ◽  
Neoclassical Model ◽  
Keynesian Model ◽  
Multiplier Effect ◽  
Stabilizing Effect ◽  
Private Spending

AbstractExpansionary fiscal policy is mired in controversy. Its proponents suggest that during recession, it stimulates investors’ activity and has a stabilizing effect on economic growth. However, its opponents point to the costs associated with the budget deficit and public debt handling. Increased public spending may result in an increase in the interest rates, which may, in turn, hinder private investment and weaken the multiplier effect of public spending. The following study examines how private spending and market interest rates reacted to changes in public spending in Poland. The study has shown that public spending stimulates private spending, which is consistent with the Keynesian model, but it also leads to an increase in market interest rates, which is consistent with the neoclassical model.

The Impact of Public Debt on GDP Growth – the Debt Multiplier in the Case of Albania

2017 ◽  
Vol 3 (4) ◽  
pp. 60-67
Author(s):  
Dorjan Teliti ◽  
Adriatik Kotorri
Keyword(s):  
Public Debt ◽  
Impact Analysis ◽  
Public Investment ◽  
Objective Assessment ◽  
Private Investment ◽  
Optimal Level ◽  
Practical Calculation ◽  
Public And Private ◽  
Public Investments ◽  
The Impact

Debates about the level of public debt and their impact on the level of investment and the economy as a whole, are permanent due to the lack of an optimal level offered by economic literature. The recent banking financial crisis brought some EU countries with very high levels of public debt, beyond the maximum limits laid down in EU membership agreements. While in developing countries, public debt is part of the economic debates and has often caused political confrontation. Although with a lower public sensitivity compared to the level of investment, unemployment and the level of prices, public debt plays an important role in the proper performance of these parameters. Increasing or decreasing public spending and especially public investment directly affects the level of investments, employment, prices, production, etc. Public debt, for the most part, is used to finance these public investments. Put together, the level of public debt affects precisely these parameters. Specifically, the level of public debt directly influencing public investment (G) primarily affects the level of public and private investment (I), the level of employment, the level of consumption in an economy (C) and the level of production affecting the level of imports (I) and exports (X). All of the above parameters are part of the Gross Domestic Product or GDP. The public debt level impact analysis at the level of GDP is measured by the Keynesian public debt multipliers. It is precisely the simplified and practical calculation that this multiplier is the focus of this paper. The aim is to calculate the Keynesian public debt multipliers for Albania to analyze the efficiency of public debt utilization in recent years when it has been part of the debate because of its rise to high historical levels. The calculation of this Multiplier for the developed Western countries as well as the emerging countries of the region creates the possibility of a comparative analysis to have a more objective assessment of the efficiency of using public debt in function of the Albanian economy’s growth in the last 10 years.

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