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Fiscal Implications of Interest Rate Normalization in the United States
Author: Huixin Bi, Ms. Wenyi Shen, and Susan Yang Shu-Chun
Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 090
Language:
English
Publication Date:
03 May 2019
DOI:
https://0-doi-org.library.svsu.edu/10.5089/9781498311151.001
ISBN:
9781498311151
ISSN:
1018-5941
Pages:
45
Keywords:
WP; interest rate; income tax; monetary policy; interest rate normalization; monetary and fiscal policy interaction; fiscal sustainability; non linear DSGE models; New Keynesian model; devaluation effect; income tax tax rate; debt level; equilibrium debt valuation equation; liabilities decline; Central bank policy rate; Inflation; Capital income tax; Interest payments
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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.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund