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

Category: Macro Seminar
When: 10 Mai 2022
, 14:15
 - 15:30
Where: HoF E.01/Deutsche Bank and online (Zoom)
Speaker: Johannes Brumm (Das Karlsruher Institut für Technologie)

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

Authors: Johannes Brumm, Xiangyu Feng, Laurence Kotlikoff, and Felix Kubler

Abstract: Is deficit finance, explicit or implicit, free when 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 question in simple closed and open economies and show that achieving Pareto gains requires implausible calibrations. Even then, the gains reflect, depending on the economy's openness, improved intergenerational risk-sharing, improved international risk-sharing, and beggaring thy neighbor -- not intergenerational redistribution per se. Low government borrowing rates, including borrowing rates running far below growth rates, justify improved risk-sharing between generations and countries. They provide no convincing basis for using deficit finance to redistribute from young and future generations or other countries.

Paper link: https://johannesbrumm.com/wp-content/uploads/2022/04/LowRatesHighDebt_April2022.pdf