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Government Debt and Capital Accumulation in an Era of Low Interest Rates

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  • N. Gregory Mankiw

    (Harvard University)

Abstract

This essay discusses the reasons for and implications of the decline in real interest rates around the world over the past several decades. It suggests that the decline in interest rates is largely explicable from trends in saving, growth, and markups. In this environment, greater government debt is likely not problematic from a budgetary standpoint. But a Ponzi-like scheme of perpetual debt rollover might fail, and such a failure would make a bad state of the world even worse. In addition, even if a perpetual debt rollover succeeds, the increased debt could still crowd out capital, reducing labor productivity, real wages, and consumption.

Suggested Citation

  • N. Gregory Mankiw, 2022. "Government Debt and Capital Accumulation in an Era of Low Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(1 (Spring), pages 219-231.
    • Handle: RePEc:bin:bpeajo:v:53:y:2022:i:2022-01:p:219-231
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    File URL: https://www.brookings.edu/articles/fiscal-policy-and-budget-deficits-following-the-pandemic/
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    Cited by:

    1. Ray C. Fair, 2022. "Why Have Interest Rates Been Low?," Cowles Foundation Discussion Papers 2340, Cowles Foundation for Research in Economics, Yale University.
    2. Heylen, Freddy & Mareels, Marthe & Van Langenhove, Christophe, 2024. "Long-run perspectives on r-g in OECD countries: An empirical analysis," Journal of International Money and Finance, Elsevier, vol. 145(C).
    3. Jean-Baptiste Michau, 2022. "The Trilemma for Low Interest Rate Macroeconomics," Working Papers 2022-19, Center for Research in Economics and Statistics.
    4. Goto, Eiji, 2023. "International comovement of r∗: A case study of the G7 countries," Journal of Empirical Finance, Elsevier, vol. 74(C).

    More about this item

    Keywords

    real interest rates; monetary policy; fiscal policy; government debt;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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