Government Debt and Capital Accumulation in an Era of Low Interest Rates
This essay discusses the reasons for and implications of the decline in real interest rates around the world over the past several decades. It suggests that the decline in interest rates is largely explicable from trends in saving, growth, and markups. In this environment, greater government debt is likely not problematic from a budgetary standpoint. But a Ponzi-like scheme of perpetual debt rollover might fail, and such a failure would make an already-bad state of the world even worse. In addition, even if a perpetual debt rollover succeeds, the increased debt could still crowd out capital, reducing labor productivity, real wages, and consumption.
This paper was prepared for the Brookings Panel on Economic Activity, Spring 2022. I am grateful to Laurence Ball, Olivier Blanchard, Rohit Goyal, Laurence Kotlikoff, Ludwig Straub, and Lawrence Summers for helpful discussion and comments. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
N. Gregory Mankiw, 2022. "Government Debt and Capital Accumulation in an Era of Low Interest Rates," Brookings Papers on Economic Activity, vol 2022(1), pages 219-231.