Working Paper: NBER ID: w31577
Authors: Julien Acalin; Laurence M. Ball
Abstract: The fall in the U.S. public debt/GDP ratio from 106% in 1946 to 23% in 1974 is often attributed to high rates of economic growth. This paper examines the roles of three other factors: primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951. Our central result is a simulation of the path that the debt/GDP ratio would have followed with primary budget balance and without the distortions in real interest rates caused by surprise inflation and the pre-Accord peg. In this counterfactual, debt/GDP declines only to 74% in 1974, not 23% as in actual history. Moreover, the ratio starts rising again in 1980 and in 2022 it is 84%. These findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.
Keywords: No keywords provided
JEL Codes: E31; E43; E65; H60; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Primary surpluses (H62) | Debt reduction (H63) |
| Interest rate peg (E43) | Distorted real interest rates (E43) |
| Distorted real interest rates (E43) | Debt dynamics (H63) |
| Surprise inflation (E31) | Reduced real interest rates (E43) |
| Reduced real interest rates (E43) | Debt reduction (H63) |