{
  "title": "Fiscal Implications of Interest Rate Normalization in the United States",
  "publication": "IMF Working Papers, May 3, 2019",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2022/06/06/fiscal-implications-of-interest-rate-normalization-in-the-united-states-46820",
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  "summary": "This paper studies the main channels through which interest rate normalization has fiscal implications in the United States.",
  "sections": [
    {
      "heading": "Main channels and mechanisms",
      "content": "- Unexpected inflation reduces the real value of government liabilities.\n- A rising policy rate increases government financing needs through:\n  - higher interest payments, and\n  - lower real bond prices.\n- Interaction of these forces produces a non-monotonic path for the real government debt burden:\n  - an initial decline in the real debt burden, followed by a rise even when tax revenues increase during an expansion."
    },
    {
      "heading": "Key findings",
      "content": "- 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.\n- This negligible increase in default risk occurs despite a much higher federal debt-to-GDP ratio than the post-war historical average."
    },
    {
      "heading": "Model and analytical focus",
      "content": "- The analysis emphasizes monetary and fiscal policy interaction using New Keynesian and non linear DSGE models.\n- Technical constructs and keywords highlighted in the study include:\n  - devaluation effect, equilibrium debt valuation equation, fiscal sustainability,\n  - Capital income tax, income tax, interest payments, interest rate normalization,\n  - liabilities decline and debt level dynamics."
    },
    {
      "heading": "Implications for policy",
      "content": "- Policymakers should consider that:\n  - Inflation episodes can mechanically reduce real liabilities, but\n  - normalization of the policy rate raises financing needs via higher interest payments and depressed bond prices, which can reverse initial improvements in the real debt burden.\n- Fiscal planning should account for the dynamic, potentially delayed, increase in the real debt burden following interest rate normalization, even in periods of rising tax revenues.\n\nSource: Fiscal Implications of Interest Rate Normalization in the United States (IMF Working Paper).\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2022/06/06/fiscal-implications-of-interest-rate-normalization-in-the-united-states-46820"
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    "Authors: Huixin Bi, Wenyi Shen, Shu-Chun Susan Yang",
    "Published: May 3, 2019",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781498311151.001",
    "Unexpected inflation reduces the real value of government liabilities.",
    "A rising policy rate increases government financing needs through:",
    "Interaction of these forces produces a non-monotonic path for the real government debt burden:",
    "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.",
    "This negligible increase in default risk occurs despite a much higher federal debt-to-GDP ratio than the post-war historical average.",
    "The analysis emphasizes monetary and fiscal policy interaction using New Keynesian and non linear DSGE models.",
    "Technical constructs and keywords highlighted in the study include:",
    "Policymakers should consider that:",
    "Fiscal planning should account for the dynamic, potentially delayed, increase in the real debt burden following interest rate normalization, even in periods of rising tax revenues.",
    "**Working Paper**"
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