Fiscal Implications of Interest Rate Normalization in the United States

Author/Editor:

Huixin Bi ; Wenyi Shen ; Shu-Chun Susan Yang

Publication Date:

May 3, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper studies the main channels through which interest rate normalization has fiscal implications in the United States. While unexpected inflation reduces the real value of government liabilities, a rising policy rate increases government financing needs because of higher interest payments and lower real bond prices. After an initial decline, the real government debt burden rises even with higher tax revenues in an expansion. Given the current net debt-to-GDP ratio at around 80 percent, interest rate normalization leads to a negligible increase in the sovereign default risk of the U.S. federal government, despite a much higher federal debt-to-GDP ratio than the post-war historical average.

Series:

Working Paper No. 19/90

English

Publication Date:

May 3, 2019

ISBN/ISSN:

9781498311151/1018-5941

Stock No:

WPIEA2019090

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

45

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