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Our reading
The main obstacle to sound fiscal policy debate is a widespread, quasi-religious belief that public debt is inherently bad.
Their wordsThe main challenge in discussing fiscal policy is the widely held and nearly religious belief that public debt is very bad.
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Our reading
Low interest rates reflect underlying fundamental economic factors rather than central bank policy choices.
Their wordsIn other words, central banks are not to blame for low rates: these low rates just reflect underlying fundamental factors.
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Our reading
A persistently low safe interest rate signals that capital is not very productive at the margin, an underlying economic problem rather than a policy variable.
Their wordsA low r is actually a signal that something is wrong with the economy: In effect, if we think of the safe rate as the risk-adjusted rate of return on capital, the low safe rate is sending the signal that, risk adjusted, the return on capital is low.
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Our reading
There is no tight relation between growth rates and interest rates, either theoretically or empirically.
Their wordswhile the growth rate may well affect saving and investment, there is no tight
relation between growth rates and interest rates, either on theoretical or empirical
grounds.
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Our reading
The decades-long decline in real interest rates across major economies was not caused by the Global Financial Crisis or the Covid crisis.
Their wordsReal interest rates have steadily declined in all major economies for more than three decades. This decline was not caused by the Global Financial Crisis or the Covid crisis.
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Our reading
Sovereign debt markets can suffer sudden stops in investor demand even without material changes in economic fundamentals.
Their wordsSovereign debt markets (and many other markets as well) are subject to sudden stops in which investors either drop out or ask for large spreads even in the absence of large changes in fundamentals.
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Our reading
A longer average debt maturity protects a government from temporary interest-rate spikes and gives it more time to adjust to permanent rate increases.
Their wordsA longer maturity of debt protects the government from a temporary increase in the short run interest rate, and it gives it more time to adjust to a permanent increase.
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Our reading
Assessing whether government debt is sustainable is as much an art as a science.
Their wordsassessing debt sustainability is as much art as it is science.
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Our reading
Quantitative rules are not a reliable tool for ensuring government debt sustainability.
Their wordsI am
skeptical of the use of quantitative rules to ensure
debt sustainability.
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Our reading
Public investment cannot be assumed to be automatically financeable by debt merely because it has high social returns.
Their wordsThus, as desirable as public investment is, the proposition that it can be automatically financed by debt is wrong.
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Our reading
There is no universal debt-to-GDP threshold beyond which government debt becomes unsustainable; sustainability depends on factors like the real interest rate.
Their wordsThe analysis in
this chapter has shown that there is no such thing as a universal threshold over
which debt becomes unsustainable, and that the relevant debt level depends
on many factors, in particular the real interest rate on debt.
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Our reading
A central bank can eliminate a self-fulfilling ('sunspot') debt crisis simply by credibly committing to buy as many bonds as needed at the low interest rate.
Their wordsThis is precisely the role the central bank can play. By announcing that it stands ready to buy the bonds that investors want to sell at the price associated with the low interest rate, and credibly indicating that it has deep enough pockets to buy whatever is needed, it can eliminate the bad equilibrium.
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Our reading
Central bank purchases of government bonds are not bailouts and do not automatically cause inflation, since they only change the composition of the consolidated government's liabilities, not their total.
Their wordsGovernments have not been bailed out by their central banks. As I discussed earlier, central bank intervention does not reduce the overall liabilities of the consolidated government, just their composition. And it does not automatically lead to more inflation: It increases the size of the balance sheet of the central bank, but it does not increase the size of the non-interest-paying money stock.
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Our reading
Canceling government bonds held by a central bank creates no fiscal space, because the reduction in government interest payments is exactly offset by an equal reduction in the profits the central bank remits to the government.
Their wordsThe proposition is that the cancellation of the bonds held by the central bank would decrease the amount of interest payments and thus the debt service of governments. And indeed, it would. But it would have another effect—namely, to decrease the revenues of the central bank and thus the profits that the central bank turns in to the government. This second effect would be exactly of the same size as the first, and the net effect on the government budget constraint would be equal to zero.
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Our reading
The probability of a self-fulfilling bad equilibrium in sovereign debt markets depends little on the debt level itself, but is much reduced by a rule linking the primary balance to debt service increases.
Their wordsI have argued that the probability of a bad equilibrium is only marginally influenced by the level of debt, but can be much reduced by a contingent rule making the primary balance react to an increase in debt service.
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Our reading
The price level behaves as the aggregate of mostly backward-looking decisions rather than as an asset price, except during hyperinflation, so expected future primary balances barely affect it today.
Their wordsI believe that, except in times of hyperinflation, the price level does not behave as an asset price but as the aggregate of billions of mostly backward-looking decisions, and that expectations of future primary balances have little effect on the price level today.
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Our reading
A fiscal expansion when the economy is already at potential output prompts monetary tightening that dampens or eliminates its effect on output.
Their wordsIf a fiscal expansion takes place when output is already at potential, monetary policy is likely to tighten, leading to higher interest rates and thus a smaller effect or even no effect of the fiscal expansion on output.
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Our reading
Fiscal multipliers vary across time and place but are generally nonzero, positive for spending, negative for taxes, and larger when monetary policy cannot offset them.
Their wordsMultipliers are likely to vary a lot over time and space, but the bulk of the evidence is that they are different from zero, positive for spending, negative for taxes, and that they are stronger when monetary policy does not or cannot react to fiscal policy.
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Our reading
The lower a country's neutral interest rate, the smaller the fiscal and welfare costs of public debt and the larger its welfare benefits.
Their wordsThe lower the neutral rate, the
smaller the fiscal and welfare costs and the larger the welfare benefits of
debt and deficits.
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Our reading
Judging by output kept near potential despite weak private demand, Japan's decades of high debt and low inflation reflect a qualified policy success, not failure.
Their wordsJapanese macroeconomic policy is often characterized as a failure, with the central bank unable to achieve its inflation target, a low growth rate, and debt ratios steadily rising to reach more than 170% for net debt and 250% for gross debt. I think it should be seen instead as a qualified success, with the use of aggressive fiscal and monetary policies to compensate for very weak private demand: Output has remained close to potential.
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Our reading
During post-2008 fiscal consolidation, the costs of high public debt were overestimated and fiscal multipliers were underestimated, understating the output costs of austerity.
Their wordsThe costs of high debt were perceived to be very high—higher than they truly were—and the multipliers were underestimated, leading to an underestimate of the output costs of fiscal consolidation.
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Our reading
Automatic fiscal stabilizers give fiscal policy an advantage over monetary policy in stabilizing output because they act faster.
Their wordsIn some dimensions, fiscal policy has an advantage over monetary policy in stabilizing output. The main example is indeed the operation of
automatic stabilizers, which act faster than monetary policy can.