Will Rising Interest Rates Lead to Fiscal Crises?

Olivier Blanchard and Jeromin Zettelmeyer ()

No PB17-27, Policy Briefs from Peterson Institute for International Economics

Abstract: A balanced, broad-based economic recovery seems under way in all major regions of the world. Managing the recovery poses challenges in the short run but they appear relatively benign. Looking forward, however, the authors see a set of new risks: (1) Partly because of the crisis and partly because of subsequent low growth, public debt has reached postwar historical highs in many advanced countries; (2) productivity growth, and with it potential growth, has declined. Whether it remains low or picks up in the future is uncertain; (3) interest rates are expected to increase from their current low levels. By how much and at what pace is—again—uncertain; and (4) many advanced countries have strong populist movements (or even populist leaders) espousing risky macroeconomic policies. The authors warn that rising interest rates, combined with low growth, high debt, and populist pressure, would be a recipe for fiscal crises.ivity growth. If they avoid policy errors, President Trump or his successor could have the good fortune of presiding over a productivity revival.

Date: 2017-07
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