CEU Electronic Theses and Dissertations, 2019
| Author | Lukács, Balázs |
|---|---|
| Title | Rising Interest Rates and Government Debt Dynamics in the United States |
| Summary | The public debt to GDP ratio of the federal government of the United States is at a level not seen since the end of the Second World War. After a significant improvement in the government’s fiscal balances following the Great Recession, the fiscal position started to deteriorate again, even as the economic output is above its potential level, and major social programs of the federal government are running towards insolvency. Interest rates have also started to rise increasing financing cost of government debt in the future. The goal of this paper to analyze how different fiscal policy decisions and interest rate trajectories effect public debt outcomes in the time period of the next 14 years. We also explore how a possible recession would impact the debt level. For these calculations we use a model which decomposes changes in the public debt to GDP ratio into four factors: real GDP growth, inflation, nominal interest rate, primary balance, and captures their interactions. In our analysis we confirm the findings of the Congressional Budget Office that US federal government debt is on an unsustainable path. We also concluded that contrary to our expectations changes in the average real short-term equilibrium interest rate in the time horizon of our analysis has no major impact on government debt. Furthermore, we find that a recession can lead to a larger public debt overhang for a longer period despite the government best efforts to reduce it. In our key fiscal policy recommendation suggest the federal government to start a fiscal consolidation program as soon as possible, reversing the effect of previous pro-cyclical measures to gain fiscal space preparing for a possible economic downturn. |
| Supervisor | Bokros, Lajos András |
| Department | Economics MA |
| Full text | https://www.etd.ceu.edu/2019/lukacs_balazs.pdf |
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