Home Breaking News Debt-ridden countries facing weak growth should spend, Jackson Hole study argues

Debt-ridden countries facing weak growth should spend, Jackson Hole study argues

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Auerbach/Gorodnichenko


The United States would have to reduce non-interest spending or increase revenues by over 9% of GDP relative to baseline projections in order to hit its current debt-to-GDP ratio in 2050.

Countries growing weakly shouldn’t be reluctant to invest to stimulate growth even if they are racked with high levels of debt, according to a paper presented at the Kansas City Fed conference in Jackson Hole.

The paper, from the University of California, Berkeley’s Alan Auerbach and Yuriy Gorodnichenko, comes as countries including the United States are still debating what should be done in light of the weak growth in the wake of the Great Recession.

The study argues that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness.

“Expansionary fiscal policies adopted when the economy is weak may not only stimulate output but also reduce debt-to-GDP ratios,” the researchers wrote. What’s more, such policies will reduce interest rates and the cost to insure against a default on government debt, “while the outcomes when the economy is strong are more likely to have the conventional effects,” they argued.

The study comes at a time when global central banks are whittling the stimulus they’ve provided. After four rate hikes, the Federal Reserve is expected next month to start reducing the assets on its balance sheet. The European Central Bank is expected to stop buying bonds soon.

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The researchers do acknowledge they’re not making an “unconditional” call for aggressive spending.

“Indeed, the experience of Greece and other countries in Southern Europe is a grave warning about the political risks and limits of fiscal policy. Bridges to nowhere, ‘pet’ projects and other wasteful spending can outweigh any benefits of countercyclical fiscal policy,” they say.



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