Did the U.S. Really Grow Out of Its World War II Debt?

Julien Acalin and Laurence Ball

No 2024/005, IMF Working Papers from International Monetary Fund

Abstract: The fall in the U.S. public debt/GDP ratio from 106% in 1946 to 23% in 1974 is often attributed to high rates of economic growth. This paper examines the roles of three other factors: primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951. Our central result is a simulation of the path that the debt/GDP ratio would have followed with primary budget balance and without the distortions in real interest rates caused by surprise inflation and the pre-Accord peg. In this counterfactual, debt/GDP declines only to 74% in 1974, not 23% as in actual history. Moreover, the ratio starts rising again in 1980 and in 2022 it is 84%. These findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.

Keywords: U.S. Public Debt; Financial Repression; Surprise Inflation; r-g; GDP ratio; World War II debt; GDP path; inflation expectation; Inflation; Real interest rates; Fiscal stance; Interest payments; Global (search for similar items in EconPapers)
Pages: 55
Date: 2024-01-12
New Economics Papers: this item is included in nep-ban and nep-his
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Working Paper: Did the U.S. Really Grow Out of Its World War II Debt? (2023)
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