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

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

  • Johannes Brumm
  • Xiangyu Feng
  • Laurence Kotlikoff
  • Felix Kubler
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

Is deficit finance free when real 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 stochastic closed- and open-economy OLG models. Unfortunately, Pareto gains are predicted only for implausible calibrations. Even then, the gains reflect improved intergenerational risk-sharing, improved international risksharing, and beggaring thy neighbor—not intergenerational redistribution per se. As we show, theoretically and quantitatively, low government borrowing rates suggest state-contingent, bilateral transfers between generations, not unconditional, unilateral redistribution from future to current generations.

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