Fiscal Policy Under Low Interest Rates

17 June 2022

As Australia’s annual inflation rate soars to 5.1 per cent – the highest annual inflation rate in two decades – policymakers in advanced economies find themselves in an unusual economic environment.

Although public debt ratios are historically high, the Reserve Bank of Australia cash rate is still near an all-time low in nominal terms, and are negative in real terms. Similar trends prevail in other countries, suggesting that real interest rates will remain well below the rate of economic growth, and possibly negative, for the foreseeable future. Such a fundamental change calls for a rethinking of the role of fiscal and monetary policy.

Join renowned economist and senior fellow at the Peterson Institute for International Economics Professor Olivier Blanchard as he discusses the direction fiscal policy should take. There is a wide set of opinions about this. Some, pointing to the high debt levels, make debt reduction an absolute priority. Others, pointing to the low interest rates, are less worried; they suggest that there is still fiscal space, and, if justified, further increases in debt should not be ruled out.

In this webinar, based on his new book of the same title, Professor Blanchard uses examples of policy in action to argue that low interest rates decrease not only the fiscal costs of debt, but also the welfare costs of debt. At the same time, he shows how low rates decrease the room for the manoeuvring of monetary policy – and thus increase the benefits of using fiscal policy, including deficits and debt, for macroeconomic stabilization. In short, low rates imply lower costs and higher benefits of debt.

Webinar recording (YouTube, 1h:1m)

The UQ Economics Thought Leadership Series aims to inspire, influence and promote innovative ideas and insights. We are looking forward to you being part of this important conversation.