scholarly journals Public Debt and Low Interest Rates

2019 ◽  
Vol 109 (4) ◽  
pp. 1197-1229 ◽  
Author(s):  
Olivier Blanchard
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
Public Debt ◽  
Multiple Equilibria ◽  
Rate Of Return ◽  
Asset Markets ◽  
Marginal Product ◽  
Welfare Costs ◽  
Marginal Product Of Capital ◽  
Adjusted Rate

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. (JEL E22, E23, E43, E62, H63)

scholarly journals Land

2021 ◽  
pp. 105-136
Author(s):  
Carl Christian von Weizsäcker ◽  
Hagen M. Krämer
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
Public Debt ◽  
Agricultural Land ◽  
Golden Rule ◽  
Government Bonds ◽  
Balance Sheets ◽  
Land Rents ◽  
The Interest Rate ◽  
China Region

AbstractPrivate wealth is comprised in part of capitalized future land rents. The Golden Rule of Accumulation is preserved even if we introduce land into our meta-model. Urban land is far more valuable than agricultural land. The risk tied to land leads to a reduction in its value in the form of a “risk premium” α > 0. Land rents can be taxed without any possibility of the tax being passed on to tenants and without loss of efficiency. If the tax is offset by a reduction in income tax, their taxation can even give rise to efficiency gains and positive distributive effects. The possibility of government intervention in the residential rental market represents a further risk for landowners. The sensitivity of the value of land to changes in the interest rate and hence the risk premium α rise with falling interest rates. In light of these many different risks, land as investment can only to a limited extent be a substitute for government bonds and hence for increasing private wealth by way of public debt. We calculate the value of land as asset category in the OECD plus China region. To this end, we primarily rely on data from statistical offices that provide figures for land in their national balance sheets. Our calculations show that the value of land in the countries of the OECD plus China region is about twice annual consumption in the region.

scholarly journals THE SIMPLE DYNAMICS OF PUBLIC DEBT WITH PRODUCTIVE PUBLIC GOODS

2016 ◽  
Vol 21 (4) ◽  
pp. 1059-1095 ◽  
Author(s):  
Pierre-Richard Agénor ◽  
Devrim Yilmaz
Keyword(s):  
Public Goods ◽  
Risk Premium ◽  
Public Debt ◽  
Network Effects ◽  
Multiple Equilibria ◽  
Public Investment ◽  
Golden Rule ◽  
Output Growth ◽  
Fiscal Rules ◽  
Growth Equilibrium

This paper analyzes the dynamics of public debt in a simple two-period overlapping-generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge are characterized. The analysis is then extended to consider the case of partial depreciation, an endogenous risk premium, an endogenous primary surplus rule, a generalized golden rule, a nonseparable utility function, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving, even in a context of fiscal retrenchment, the allocation of resources to specific types of public investment.

scholarly journals Public Debt, Interest Rates, and Negative Shocks

2020 ◽  
Vol 110 ◽  
pp. 137-140
Author(s):  
Richard W. Evans
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Public Debt ◽  
Government Debt ◽  
Welfare Gains ◽  
Welfare Costs ◽  
Developed Economies ◽  
Long Run ◽  
Welfare Losses ◽  
Risk Reducing

Debt-to-GDP ratios across developed economies are at historically high levels, and government borrowing rates remain persistently low. Blanchard (2019) provides evidence that the fiscal costs and welfare costs are low of increased government debt in low interest rate environments. This paper attempts to replicate Blanchard's main results and tests their robustness to key assumptions about risk in the model. This study finds that Blanchard's stated approach results in no long-run average welfare gains from increased government debt and that those welfare losses are exacerbated if some strong risk-reducing assumptions are relaxed to more realistic values.

Insurgent Compensation: Evidence from Iraq

2013 ◽  
Vol 103 (3) ◽  
pp. 518-522 ◽  
Author(s):  
Benjamin W Bahney ◽  
Radha K Iyengar ◽  
Patrick B Johnston ◽  
Danielle F Jung ◽  
Jacob N Shapiro ◽  
...  
Keyword(s):  
Risk Premium ◽  
Opportunity Cost ◽  
Marginal Product ◽  
Unskilled Labor ◽  
Outside Options ◽  
Estimated Risk ◽  
Do So ◽  
Low Wages

Participating in insurgency is physically risky. Why do people do so? Using new data on 3,799 payments to insurgent fighters by Al Qa'ida Iraq, we find that: (i) wages were extremely low relative to outside options, even compared to unskilled labor; (ii) the estimated risk premium is negative; and (iii) the wage schedule favors equalization and provides additional compensation for larger families. These results challenge the notion that fighters are paid their marginal product, or the opportunity cost of their time. They may be consistent with a “lemons” model in which fighters signal commitment by accepting low wages.

Investment in New Proved Oil Reserves: An Austrian Perspective

2017 ◽  
Vol 12 (s1) ◽  
Author(s):  
Bradley T. Ewing ◽  
Mark Thornton ◽  
Mark Yanochik
Keyword(s):  
Time Series ◽  
Interest Rates ◽  
Financial Time Series ◽  
Commodity Prices ◽  
Asset Markets ◽  
Oil Reserves ◽  
Econometric Methods ◽  
Low Interest Rates ◽  
Treasury Bond ◽  
Exploration And Production

AbstractExploration and production (E&P) companies must replace oil produced with new proved reserves in order to sustain their existence, generate future revenues and value. Extensions constitute the largest type of additions to new proved reserves. Adding reserves through extensions is capital intensive and both the real price of oil (represented by real refiner acquisition cost) and real interest (represented by real yield on 10 year Treasury bond) will influence the investment in new discoveries of proved reserves. However, recent periods of unusually high commodity prices and ultra-low interest rates, often linked to monetary policy, may have led to an over-investment in reserves through extensions. Accordingly, using U.S. data (1977–2014) we test for the existence of “explosive behavior” in the volume of extensions over time with financial time series econometric methods referred to as right-tail ADF tests which have traditionally been used for identifying speculative bubbles in asset markets. Empirical evidence identifies a period of explosive (“bubble-like”) behavior in the time series of extensions having occurred beginning 2010 through 2014. This research provides an Austrian explanation for the empirical results consistent with the notion of malinvestment.

scholarly journals Persistent Liquidity Effects and Long-Run Money Demand

2014 ◽  
Vol 6 (2) ◽  
pp. 71-107 ◽  
Author(s):  
Fernando Alvarez ◽  
Francesco Lippi
Keyword(s):  
Interest Rates ◽  
Money Demand ◽  
Asset Markets ◽  
Propagation Mechanism ◽  
Monetary Model ◽  
Long Run ◽  
Short Run ◽  
The Stability ◽  
Two Parameters

We present a monetary model with segmented asset markets that implies a persistent fall in interest rates after a once-and-for-all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization of this mechanism, showing that the magnitude of the liquidity effect on impact, and its persistence, depend on the ratio of two parameters: the long-run interest rate elasticity of money demand and the intertemporal substitution elasticity. The model simultaneously explains the short-run “instability” of money demand estimates as well as the stability of long-run interest-elastic money demand. (JEL E13, E31, E41, E43, E52, E62)

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