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Olivier Blanchard

What Olivier Blanchard thinks about public debt

@olivier-blanchard · 24 positions · 1 change of mind

Economist; former chief economist of the International Monetary Fund.

Everything they publish, on ppll ↗

Olivier Blanchard did not write this page.

We collected these quotes from things they published elsewhere, and every quote links to where it was said. They have no account here and have not endorsed this site. Quotes are word for word; the short line under each one is our own restatement, not their wording. Their own site. Is this you? Claim it or ask us to remove it. Or tell us what is wrong here.

16 dated positions, 2019 to 2023, in their own words. Our reading of what Olivier Blanchard has said — not written or endorsed by them.

Our readingThe argument made repeatedly is that there is no universal threshold at which debt becomes unsustainable: what matters is the interest rate against the growth rate, and the assessment is as much an art as a science. The obstacle named is a quasi-religious belief that public debt is inherently bad.

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.

There is no universal debt-to-GDP threshold beyond which government debt becomes unsustainable; sustainability depends on factors like the real interest rate.

  1. Our readingWith r-g near zero, any advanced economy running a primary deficit will see its debt-to-GDP ratio rise once existing debt is refinanced at current rates.

    Their wordsThus, once current debt has been refinanced and the average interest on debt reflects the higher long rates, absent changes in policy, debt ratios will increase.

    ↗If markets are right about long real rates, public debt ratios will increase for some timepiie.com

  3. Our reading · no longer heldWhen safe interest rates are expected to remain below growth rates for a long time, rolling over public debt without later tax increases is feasible and public debt may carry no fiscal cost.

    No longer holdsAcross advanced economies, the celebrated ( r - g ), i.e., the difference between the interest rate and the growth rate, appears to have durably changed sign or, at a minimum, to have gone from a substantially negative number to a number closer to zero.

    SaidAcross advanced economies, the celebrated ( r - g ), i.e., the difference between the interest rate and the growth rate, appears to have durably changed sign or, at a minimum, to have gone from a substantially negative number to a number closer to zero.

    ↗If markets are right about long real rates, public debt ratios will increase for some timepiie.com

    interest rates

  4. 17 months earlier

  5. Our readingThe 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 1st of 22 in this piece

    fiscal policyreligion

  7. Our readingSovereign 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 6th of 22 in this piece

    investing

  9. Our readingA 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 7th of 22 in this piece

    interest ratesgovernment

  11. Our readingAssessing 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 8th of 22 in this piece

    government

  13. Our readingQuantitative 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 9th of 22 in this piece

    government

  15. Our readingPublic 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 10th of 22 in this piece

  17. Our readingThere 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 11th of 22 in this piece

    interest ratesgovernment

  19. Our readingA 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 12th of 22 in this piece

    interest ratesinvesting

  21. Our readingCanceling 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 14th of 22 in this piece

    interest ratesgovernment

  23. Our readingThe 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 15th of 22 in this piece

    JavaScript

  25. Our readingThe 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 19th of 22 in this piece

    interest rates

  27. Our readingJudging 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 20th of 22 in this piece

    inflationinterest ratesJapan

  29. Our readingDuring 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.

    ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu 21st of 22 in this piece

    fiscal policy

  30. 3 years earlier

  31. Our readingWhen safe interest rates are expected to remain below growth rates for a long time, rolling over public debt without later tax increases is feasible and public debt may carry no fiscal cost.

    Their wordsIf the future is like the past, this implies that debt rollovers—that is, the issuance of debt without a subsequent increase in taxes—may well be feasible. Put bluntly, public debt may have no fiscal cost.

    ↗Public Debt and Low Interest Rates (PIIE Working Paper 19-4)piie.com

    interest rates