IMF Working Papers

Fiscal Implications of Interest Rate Normalization in the United States

By Huixin Bi, Wenyi Shen, Shu-Chun Susan Yang

May 3, 2019

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Huixin Bi, Wenyi Shen, and Shu-Chun Susan Yang. Fiscal Implications of Interest Rate Normalization in the United States, (USA: International Monetary Fund, 2019) accessed February 11, 2025

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.

Subject: Capital income tax, Central bank policy rate, External debt, Financial services, Inflation, Interest payments, Prices, Public debt, Taxes

Keywords: Capital income tax, Central bank policy rate, Debt level, Devaluation effect, Equilibrium debt valuation equation, Fiscal sustainability, Income tax, Income tax tax rate, Inflation, Interest payments, Interest rate, Interest rate normalization, Liabilities decline, Monetary and fiscal policy interaction, Monetary policy, New Keynesian model, Non linear DSGE models, WP

Publication Details

  • Pages:

    45

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/090

  • Stock No:

    WPIEA2019090

  • ISBN:

    9781498311151

  • ISSN:

    1018-5941