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The Interplay of Interest Rates and Debt-Financed Government Spending

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  • Bev Dahlby
  • Ergete Ferede

Abstract

Proponents focus on the average fiscal cost of program spending when the interest rate on government debt is less than the economy’s growth rate. They ignore the potentially large marginal fiscal cost of deficit-financed increases in spending that arise when a higher public debt increases interest rates on government debt and lowers growth rates.

Suggested Citation

  • Bev Dahlby & Ergete Ferede, 2023. "The Interplay of Interest Rates and Debt-Financed Government Spending," EconPol Policy Brief 47, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:econpb:_47
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    References listed on IDEAS

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    1. David Turner & Francesca Spinelli, 2012. "Interest-rate-growth differentials and government debt dynamics," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 103-122.
    2. Weicheng Lian & Mr. Andrea F Presbitero & Ursula Wiriadinata, 2020. "Public Debt and r - g at Risk," IMF Working Papers 2020/137, International Monetary Fund.
    3. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    5. Olivier Blanchard & Alvaro Leandro & Jeromin Zettelmeyer, 2021. "Redesigning EU fiscal rules: from rules to standards," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(106), pages 195-236.
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