Public Debt and Low Interest Rates

43 Pages Posted: 27 Mar 2019

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Date Written: February 4, 2019


Blanchard develops four main arguments concerning the costs of public debt when safe interest rates are low.

First, the current US situation in which safe interest rates are expected to remain below growth rates for a long time is more the historical norm than the exception. If 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.

Second, even without fiscal costs, public debt reduces capital accumulation and may therefore have welfare costs. However, welfare costs may be smaller than typically assumed. The reason is that the safe rate is the risk-adjusted rate of return on capital. A safe rate that is lower than the growth rate indicates that the risk-adjusted rate of return to capital is in fact low. The average risky rate, i.e. the average marginal product of capital, also plays a role, however. Blanchard shows how both the average risky rate and the average safe rate determine welfare outcomes.

Third, while the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: The lower the marginal product, the lower the welfare cost of debt.

Fourth, Blanchard discusses a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors, believing debt to be risky, require a risk premium, which increases the fiscal burden and makes debt effectively more risky. This argument, while relevant, does not have straightforward implications for the appropriate level of debt.

Some of these conclusions will be controversial. But the aim of the paper is to foster a richer discussion of the costs of debt and fiscal policy than is currently the case, not to argue for more public debt, especially in the current political environment.

Keywords: unemployment, Debt, deficits, interest rate, safe rate, risky rate, marginal product of capital, growth rate, risk premium, secular stagnation, overlapping generation, welfare, transfers

JEL Classification: H3, H6, E62

Suggested Citation

Blanchard, Olivier J., Public Debt and Low Interest Rates (February 4, 2019). Peterson Institute for International Economics Working Paper No. 19-4. Available at SSRN: or

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics