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Public Debt, Interest Rates, and Negative Shocks

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  • Richard W. Evans

Abstract

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.

Suggested Citation

  • Richard W. Evans, 2020. "Public Debt, Interest Rates, and Negative Shocks," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 137-140, May.
    • Handle: RePEc:aea:apandp:v:110:y:2020:p:137-40
    DOI: 10.1257/pandp.20201101
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    Citations

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    Cited by:

    1. Mindaugas Butkus & Diana Cibulskiene & Lina Garsviene & Janina Seputiene, 2022. "Role of Uncertainty in Debt-Growth Nexus," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(1), pages 58-78.
    2. Michael Falkenheim, 2022. "The Welfare Effects of Debt: Crowding Out and Risk Shifting: Working Paper 2022-10," Working Papers 58849, Congressional Budget Office.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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