{
  "title": "Costly Increases in Public Debt when r < g",
  "publication": "IMF Working Papers, January 12, 2024",
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  "summary": "This paper quantifies the costs of a permanent increase in debt to GDP. We employ a deterministic, overlapping generations model with two assets and no risk of default. The two assets are public debt and private (productive) capital.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Paper quantifies the costs of a permanent increase in debt to GDP.\n- Authors: Yongquan Cao, Vitor Gaspar, Adrian Peralta-Alva.\n- Date: January 12, 2024.\n- Method: deterministic, overlapping generations model with two assets and no risk of default."
    },
    {
      "heading": "Model and key assumptions",
      "content": "- Two assets: public debt and private (productive) capital.\n- Assumption: the return on private capital equals the interest rate on public debt plus an exogenously given spread.\n- Analytical version of the model is used to demonstrate mechanisms; a calibrated, richer model of the US economy follows McGrattan and Prescott (2017) and includes national accounts, fixed assets, distribution of household incomes, and demographics."
    },
    {
      "heading": "Core quantitative findings",
      "content": "- Increase in the debt ratio from 60 to 120 percent of GDP is associated with:\n  - Reduction in the capital stock of about 15 percent.\n  - Reduction in steady state GDP of about 8 percent.\n- The intuition and orders of magnitude from the simple analytical model carry over to the calibrated US model."
    },
    {
      "heading": "Intuition and mechanism",
      "content": "- Even when r < g, a permanent rise in the public debt ratio can lead to a significant reduction in steady-state GDP.\n- Crowding out of private productive capital by public debt is the central channel given the model structure and the assumed spread between returns."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Large, permanent increases in public debt ratios can have sizable negative effects on the capital stock and steady-state GDP even in environments where r < g.\n- Consideration of the composition of assets (public debt versus private capital) and the spread between returns is important for assessing long-run fiscal costs.\n\nIMF Working Paper: \"Costly Increases in Public Debt when r < g\", Yongquan Cao, Vitor Gaspar, Adrian Peralta-Alva, January 12, 2024.\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/2024/01/12/costly-increases-in-public-debt-when-r-g-543718"
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    "Authors: Yongquan Cao, Vitor Gaspar, Adrian Peralta-Alva",
    "Published: January 12, 2024",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798400263620.001",
    "Paper quantifies the costs of a permanent increase in debt to GDP.",
    "Authors: Yongquan Cao, Vitor Gaspar, Adrian Peralta-Alva.",
    "Date: January 12, 2024.",
    "Method: deterministic, overlapping generations model with two assets and no risk of default.",
    "Two assets: public debt and private (productive) capital.",
    "Assumption: the return on private capital equals the interest rate on public debt plus an exogenously given spread.",
    "Analytical version of the model is used to demonstrate mechanisms; a calibrated, richer model of the US economy follows McGrattan and Prescott (2017) and includes national accounts, fixed assets, distribution of household incomes, and demographics.",
    "Increase in the debt ratio from 60 to 120 percent of GDP is associated with:",
    "The intuition and orders of magnitude from the simple analytical model carry over to the calibrated US model.",
    "Even when r < g, a permanent rise in the public debt ratio can lead to a significant reduction in steady-state GDP.",
    "Crowding out of private productive capital by public debt is the central channel given the model structure and the assumed spread between returns.",
    "Large, permanent increases in public debt ratios can have sizable negative effects on the capital stock and steady-state GDP even in environments where r < g.",
    "Consideration of the composition of assets (public debt versus private capital) and the spread between returns is important for assessing long-run fiscal costs.",
    "**Working Paper**"
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