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

Author

Listed:
  • Johannes Brumm
  • Xiangyu Feng
  • Laurence 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 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 Kotlikoff & Felix Kubler, 2024. "When Interest Rates Go Low, Should Public Debt Go High?," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 432-469, October.
    • Handle: RePEc:aea:aejmac:v:16:y:2024:i:4:p:432-69
    DOI: 10.1257/mac.20230154
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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