Debt Sustainability When R – G < 0: No Free Lunch After All

Tinbergen Institute Discussion Paper 2020-079/VI

56 Pages Posted: 4 Jan 2021

See all articles by Sweder van Wijnbergen

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Stan Olijslagers

University of Amsterdam

Nander de Vette

De Nederlandsche Bank

Date Written: December 07, 2020


Interest rates on public debt have for several years now fallen short of GDP growth rates in much of the Western world. In his presidential address to the AEA Blanchard argued that this implies that there are no fiscal costs to high debt. In this paper we argue that the safe rate is not the right interest rate to use for that comparison. We develop a General Equilibrium Asset Pricing model and econometrically estimate the relevant characteristics of the stochastic processes driving the primary surplus in relation to the growth rate of aggregate consumption and derive the proper risk premium. The resulting interest rate exceeds the growth rate. We then calculate the discounted value of future primary surpluses using the same stochastic process for the primary surplus and compare that to the market value of the (Dutch) public sector debt. We test various explanations for the gap between these two and derive the fiscal adjustment necessary to eliminate it (the "fiscal sustainability gap").

Keywords: debt valuation, sustainable deficits, fiscal adjustment gap

JEL Classification: H6, H62, G12

Suggested Citation

van Wijnbergen, Sweder and Olijslagers, Stan and de Vette, Nander, Debt Sustainability When R – G < 0: No Free Lunch After All (December 07, 2020). Tinbergen Institute Discussion Paper 2020-079/VI, Available at SSRN: or

Sweder Van Wijnbergen (Contact Author)

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA

Centre for Economic Policy Research (CEPR)

United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stan Olijslagers

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB

Nander De Vette

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB

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