Abstract
Over the past decade in many advanced economies, real interest rates have been decidedly below the growth rate of the economy, but estimates of the marginal product of capital remain higher. Thus, there is a finite bubble component in public debt while the economy is dynamically efficient. I analyse trade-offs for fiscal, monetary and financial repression policy in this scenario. In contrast to standard analyses, I find that the composition of a tax cut determines whether the resulting deficits ever have to be repaid. Inflating away the debt can backfire. Financial repression is effective at loosening the government budget constraint but tightens the economy's resource constraint.
About the Speaker
Ricardo Reis is the A W Phillips Professor of Economics at the London School of Economics. He has published widely on macroeconomics. His main areas of research include the interactions of fiscal and monetary policy, unconventional monetary policies and the central bank's balance sheet, inflation expectations, and the role of capital misallocation in the European slump and crisis. Professor Reis is an academic consultant at the Bank of England and the Federal Reserve System. He directs the Economic and Social Research Council (ESRC) Centre for Macroeconomics in the United Kingdom and serves on the council or as an adviser of multiple organisations. Professor Reis received his PhD from Harvard University, and was previously on the faculty at Columbia University and Princeton University.
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