Inflation and Debt Rollover under Low Interest Rates

15:40-17:00, Friday, October 25, 2024

I-206, Boxue Building

Dr. Dongling Su is now an Assistant Professor of Economics at Shanghai University of Finance and Economics. He earned his Ph.D. in Economics from Boston University. His research interests include macroeconomics, finance and public economics. He has his papers published in American Economic Journal, Journal of Public Economics, Economic Theory.

We provide a new Keynesian model with overlapping generations to study the impact of temporary and permanent increases in fiscal deficits financed by debt rollover policy when interest rates are lower than economic growth rates. We show that the debt rollover policy is feasible in the monetary regime, but leads to very slow-moving debt. This policy generates persistent inflation for a temporary increase in fiscal deficits, but persistent disinflation for a permanent increase. In terms of social welfare, the debt rollover policy dominates the conventional fiscal rule to finance a temporary increase in fiscal deficits, but is dominated if the increase is permanent.

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