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Without looking closer, it may seem cheap: Low interest rates and government borrowing

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  • Garín, Julio
  • Lester, Robert
  • Sims, Eric
  • Wolff, Jonathan

Abstract

Are periods of low interest rates advantageous times for governments to increase expenditure by issuing debt? Because borrowing costs are lower, some economists have argued that the answer is yes. We argue that the logic used in reaching this conclusion may in fact be too simplistic. Whether or not it is a good time to issue debt depends not on whether interest rates are low, but rather on why interest rates are low. We show that if interest rates are low because of an increased preference for saving, then fiscal sustainability allows increasing debt in a period of low interest rates. In contrast, if interest rates are low because of a decline in trend output growth, then it is not sustainable to increase deficit financed spending.

Suggested Citation

  • Garín, Julio & Lester, Robert & Sims, Eric & Wolff, Jonathan, 2019. "Without looking closer, it may seem cheap: Low interest rates and government borrowing," Economics Letters, Elsevier, vol. 180(C), pages 28-32.
    • Handle: RePEc:eee:ecolet:v:180:y:2019:i:c:p:28-32
    DOI: 10.1016/j.econlet.2019.02.024
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    References listed on IDEAS

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    8. Etienne Gagnon & Benjamin K. Johannsen & David López-Salido, 2021. "Understanding the New Normal: The Role of Demographics," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(2), pages 357-390, June.
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    Cited by:

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    2. Matsue, Toyoki, 2020. "The impact of short-term employment contracts on employment volatility and economic fluctuations," MPRA Paper 102731, University Library of Munich, Germany.
    3. Paolo Mauro & Jing Zhou, 2021. "$$r-g," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(1), pages 197-229, March.
    4. Moreno Badia, Marialuz & Medas, Paulo & Gupta, Pranav & Xiang, Yuan, 2022. "Debt is not free," Journal of International Money and Finance, Elsevier, vol. 127(C).

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    More about this item

    Keywords

    Interest rates; Fiscal sustainability;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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