The public debt multiplier

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28 octobre 2020

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arXiv - économie

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arXiv

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Cornell University

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Economics - General Economics

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Indebtedness

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Alice Albonico et al., « The public debt multiplier », arXiv - économie, ID : 10.1016/j.jedc.2021.104204

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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.

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