Rethinking fiscal and monetary policy in an economic environment of high debt and low interest rates.
Policy makers in advanced economies find themselves in an unusual fiscal environment: debt ratios are historically high, and—once the fight against inflation is won—real interest rates will likely be very low again. This combination calls for a rethinking of the role of fiscal and monetary policy—and this is just what Olivier Blanchard proposes in Fiscal Policy under Low Interest Rates.
There is a wide set of opinions about the direction that fiscal policy should take. Some, pointing to the high debt levels, make debt reduction an absolute priority. Others, pointing to the low interest rates, are less worried; they suggest that there is still fiscal space, and, if justified, further increases in debt should not be ruled out. Blanchard argues that low interest rates decrease not only the fiscal costs of debt but also the welfare costs of debt. At the same time, he shows how low rates decrease the room to maneuver in monetary policy—and thus increase the benefits of using fiscal policy, including deficits and debt, for macroeconomic stabilization. In short, low rates imply lower costs and higher benefits of debt.
Having sketched what optimal policy looks like, Blanchard considers three examples of fiscal policy in action: fiscal consolidation in the wake of the Global Financial Crisis, the large increase in debt in Japan, and the current US fiscal and monetary policy mix. His conclusions hold practical implications for economic and fiscal policy makers, bankers, and politicians around the world.
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- Title
- Fiscal Policy under Low Interest Rates
- Publisher
- The MIT Press
- Author(s)
- Olivier Blanchard
- Published
- 2023-01-10
- Edition
- 1
- Format
- eBook (pdf, epub, mobi)
- Pages
- 192
- Language
- English
- ISBN-10
- 0262544873
- ISBN-13
- 9780262372961
- License
- CC BY-NC-ND
- Book Homepage
- Free eBook, Errata, Code, Solutions, etc.
Cover Contents List of Figures Preface 1. Introduction 2. Preliminaries 2.1 The Neutral Interest Rate, r* 2.2 Safe Rates and Risky Rates, r and r +x 2.3 The Role of Central Banks: Trying to Achieve r =r* 2.4 Why Is “r <g” So Important? 2.5 Nominal and Real Rates and the ELB 2.6 Conclusions 3. The Evolution of Interest Rates, Past and Future 3.1 The Evolution of the Safe Rate 3.2 Interest Rates and Growth Rates 3.3 The Role of Demographics 3.4 Conclusions 4. Debt Sustainability 4.1 The Surprising Debt Dynamics When (r -g)<0 4.2 Uncertainty, Sustainability, and Fiscal Space 4.3 Can One Design Good Sustainability Rules? 4.4 Public Investment and Debt Sustainability 4.5 Multiple Equilibria and the Role of Central Banks 4.6 Central Banks, Bailouts, and Write-Offs 4.7 Conclusions 5. Welfare Costs and Benefits of Debt and Deficits 5.1 Debt and Welfare under Certainty 5.2 Debt and Welfare under Uncertainty 5.3 Fiscal Policy, the ELB, and Output Stabilization 5.4 Putting the Threads Together 6. Fiscal Policy in Action 6.1 Fiscal Austerity in the Wake of the GFC 6.2 The Japanese Experience: Success or Failure? 6.3 The Biden Bet: r, r*, and g 7. Summary and Open Issues Bibliography Index