Working Paper: NBER ID: w28232
Authors: Joshua Aizenman; Hiro Ito
Abstract: This paper overviews different exit strategies for the U.S. from the debt-overhang, and analyses their implications for emerging markets and global stability. These strategies are discussed in the context of the debates about secular-stagnation versus debt-overhang, the fiscal theory of the price level, the size of fiscal multipliers, prospects for a multipolar currency system, and historical case studies. We conclude that the reallocation of U.S. fiscal efforts towards infrastructure investment aiming at boosting growth, followed by a gradual tax increase, aiming at reaching a modest primary fiscal surplus over time are akin to an upfront investment in greater long-term global stability. Such a trajectory may solidify the viability and credibility of the U.S. dollar as a global anchor, thereby stabilizing Emerging Markets economies and global growth.
Keywords: US macro policies; global economic challenges; debt-overhang; emerging markets; fiscal policy
JEL Codes: F33; F34; F41; F55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US fiscal investment towards infrastructure (H54) | economic growth (O49) |
| economic growth (O49) | stability in emerging markets (F31) |
| US fiscal investment towards infrastructure (H54) | stability in emerging markets (F31) |
| gradual tax increases following investment (H29) | modest primary fiscal surplus (H62) |
| kick the can down the road (D25) | fiscal crisis (H12) |
| fiscal crisis (H12) | long-term global stability (F01) |