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When Interest Rates Go Low, Should Public Debt Go High?

Author

Listed:
  • Johannes Brumm
  • Xiangyu Feng
  • Laurence J. Kotlikoff
  • Felix Kubler

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 question 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.

Suggested Citation

  • Johannes Brumm & Xiangyu Feng & Laurence J. Kotlikoff & Felix Kubler, 2021. "When Interest Rates Go Low, Should Public Debt Go High?," NBER Working Papers 28951, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28951
    Note: AG EFG PE
    as

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    Cited by:

    1. Amol Amol & Erzo G. J. Luttmer, 2022. "Permanent Primary Deficits, Idiosyncratic Long-Run Risk, and Growth," Working Papers 794, Federal Reserve Bank of Minneapolis.
    2. Ray C. Fair, 2022. "Why Have Interest Rates Been Low?," Cowles Foundation Discussion Papers 2340, Cowles Foundation for Research in Economics, Yale University.
    3. Narayana R. Kocherlakota, 2023. "Public Debt Bubbles In Heterogeneous Agent Models With Tail Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 491-509, May.
    4. Brumm, Johannes & Feng, Xiangyu & Kotlikoff, Laurence & Kubler, Felix, 2022. "Are deficits free?," Journal of Public Economics, Elsevier, vol. 208(C).

    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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