IDEAS home Printed from https://ideas.repec.org/p/nsr/niesrp/25.html
   My bibliography  Save this paper

Managing the Fiscal Risk of Higher Interest Rates

Author

Listed:
  • William Allen

Abstract

The coronavirus pandemic has led to a large increase in the U.K.'s government debt, and the Office for Budget Responsibility has warned that a rise in interest rates might imperil debt sustainability. If the Bank of England Monetary Policy Committee were obliged to raise short-term interest rates to meet the inflation target, the interest costs of the commercial banks' very large reserve balances, which the Treasury has guaranteed, would increase immediately, and the government might be pressed to reduce the primary deficit quickly. This note proposes a large compulsory swap of banks' reserve balances for short and medium-dated fixed-rate gilt-edged securities. If the proposal were adopted, the government would have more time to make fiscal adjustments in the event of a rise in interest rates.

Suggested Citation

  • William Allen, 2021. "Managing the Fiscal Risk of Higher Interest Rates," National Institute of Economic and Social Research (NIESR) Policy Papers 25, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrp:25
    as

    Download full text from publisher

    File URL: https://www.niesr.ac.uk/wp-content/uploads/2021/10/NIESR-Policy-Paper-025_0-4.pdf?ver=PVlFdL9rd2L5XEbBT98P
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Covid-19; Government Debt; bank reserve swaps;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nsr:niesrp:25. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Library & Information Manager (email available below). General contact details of provider: https://edirc.repec.org/data/niesruk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.