slides17 - Government Debt and Monetary Policy Henning Bohn...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Government Debt and Monetary Policy Henning Bohn University of California Santa Barbara Outline 1. Government debt: Facts and key ideas Budget deficits and debt accumulation. What limits debt and deficits? The U.S. debt-GDP Ratio: History and projections for the future. 2. Monetary policy and the public debt: Monetization and seignorage in steady state. Unexpected inflation and the role of nominal bonds. 3. U.S. Debt: The Challenge of Managing Expectations. How justified are inflation fears? Dependence on refinancing: Potential for confidence crises. Growing government obligations: Credibility at risk. 4. International perspective. And some empirical observations.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Government Debt and Monetary Policy 2 Government Budgets: Basics Government budget deficit = Outlays – Receipts. Surplus = Receipts – Outlay. - Outlays = Spending on goods&services + Transfers + Interest on debt • Government debt = sum of accumulated past deficits. - Dynamics of debt: D(t) = D(t-1) + DEF(t). - Accounting for interest: Interest on debt(t) = i t * D(t-1) • Primary deficit = Spending + Transfers – Receipts ; excludes interest payments. - Dynamics of debt: D(t) = (1+i t ) * D(t-1) + Primary Deficit D(t) = (1+i t ) * D(t-1) - Primary Surplus • Find: Debt grows exponentially unless the primary balance is a surplus. - Primary surplus: Receipts > Spending + Transfers. - Label: “Headline deficit” = deficit with interest
Image of page 2
Government Debt and Monetary Policy 3 The Debt-GDP Ratio • Growing debt is a problem when it grows faster than the debtor’s ability to pay. - Government debt limited by the national tax base. Common measure: GDP - Math fact: GDP-growth reduces the debt-GDP ratio. (D/Y down when Y rises.) Change in Debt/GDP = Primary budget deficit/GDP + (Interest rate - Growth rate) * Initial Debt/GDP • History of U.S. fiscal policy: - Rising debt-GDP ratio during crises => High deficits in war and recession. - Declining debt-GDP ratio during “normal” times: Mostly due to GDP growth. • Measurement: Public Debt = Treasury securities outstanding - Gross debt = Public Debt + Securities held by trust funds (e.g. Social Security) - Trust funds have their own liabilities – need separate accounting [here omit]
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Government Debt and Monetary Policy 4 The U.S. Debt-GDP Ratio: 1792-2011
Image of page 4
Government Debt and Monetary Policy 5 What Limits Government Debt? Solvency : Ability to repay maturing debt. - Easy case: Maturing bonds are paid off with tax revenues. - Tricky case: Maturing bonds are repaid (in part) by issuing new bonds. Ponzi scheme : Maturing debt + interest payments always rolled into new bonds. - Verdict: Not sustainable in equilibrium with rational, forward-looking lenders. Fiscal sustainability condition : Outstanding debt backed eventually by tax revenues.
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern