A note on public debt sustainability under secular stagnation

A quick note on public debt sustainability in a world where i < g defined here as secular stagnation. There are a number of observations here relative to standard analysis when i > g.

For example, the primary balance does not depend on the bequeathed public debt stock at all, only on the future stock. So, there is no need to worry about stabilizing the backward-looking stock. Instead the focus should be the sustainable stock at some point in the unknown future when secular stagnation comes to an end.

In addition, it is possible to redefine public debt sustainability during secular stagnation as depending on the ratio of possible needed primary balance adjustment to the change in average interest rate on debt expected during normalisation.

I don’t have time to work on this properly, so if anyone wants to recycle this to influence the debate on fiscal policy, feel free.

Revised version posted 4th Nov 2020.

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