The public debt multiplier
General Economics
2022-12-05 v2 Economics
Abstract
We study the effects on economic activity of a pure temporary change in government debt and the relationship between the debt multiplier and the level of debt in an overlapping generations framework. The debt multiplier is positive but quite small during normal times while it is much larger during crises. Moreover, it increases with the steady state level of debt. Hence, the call for fiscal consolidation during recessions seems ill-advised. Finally, a rise in the steady state debt-to-GDP level increases the steady state real interest rate providing more room for manoeuvre to monetary policy to fight deflationary shocks.
Cite
@article{arxiv.2010.15165,
title = {The public debt multiplier},
author = {Alice Albonico and Guido Ascari and Alessandro Gobbi},
journal= {arXiv preprint arXiv:2010.15165},
year = {2022}
}