Fiscal Implications of Interest Rate Normalization in the United States

46 Pages Posted: 2 Jun 2019

See all articles by Huixin Bi

Huixin Bi

Federal Reserve Bank of Kansas City

Wenyi Shen

Oklahoma State University - Stillwater

Shu-Chun Susan Yang

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

This paper studies the main channels through which interest rate normalization has fiscalimplications in the United States. While unexpected inflation reduces the real value ofgovernment liabilities, a rising policy rate increases government financing needs because ofhigher interest payments and lower real bond prices. After an initial decline, the realgovernment debt burden rises even with higher tax revenues in an expansion. Given thecurrent net debt-to-GDP ratio at around 80 percent, interest rate normalization leads to anegligible increase in the sovereign default risk of the U.S. federal government, despite amuch higher federal debt-to-GDP ratio than the post-war historical average.

Keywords: Economic growth, Business cycles, Capital income, Real interest rates, Interest rate increases, interest rate normalization, monetary and fiscal policy interaction, fiscal sustainability, non linear DSGE models, New Keynesian model, limit distribution, active rule, debt level, bond price, government debt

JEL Classification: E43, E52, E62, E63, H3, E01, G21, H83, H71

Suggested Citation

Bi, Huixin and Shen, Wenyi and Yang, Shu-Chun Susan, Fiscal Implications of Interest Rate Normalization in the United States (May 2019). IMF Working Paper No. 19/90, Available at SSRN: https://ssrn.com/abstract=3397545

Huixin Bi (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Wenyi Shen

Oklahoma State University - Stillwater ( email )

Stillwater, OK 74078-0555
United States

Shu-Chun Susan Yang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
404
PlumX Metrics