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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.

Banks and Banking --- Currency crises --- Debt Management --- Debt service --- Debt --- Debts, Public --- Deflation --- Economic & financial crises & disasters --- Economics of specific sectors --- Economics --- Economics: General --- Exports and Imports --- External debt --- Finance --- Financial services --- Fiscal Policy --- Fiscal policy --- Fiscal stance --- Inflation --- Informal sector --- Interest payments --- Interest rates --- Interest Rates: Determination, Term Structure, and Effects --- International economics --- International Lending and Debt Problems --- Macroeconomics --- National Budget, Deficit, and Debt: General --- Price Level --- Prices --- Public debt --- Public finance & taxation --- Public Finance --- Real interest rates --- Sovereign Debt --- Studies of Particular Policy Episodes

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This paper tests whether Japan's key macro policy multipliers have declined since 2013, the year that Japan introduced Qualitative and Quantitative Easing. We use the augmented Blanchard-Perotti structural VAR model introduced in Ouliaris and Rochon (2021) to study the dynamic effects of shocks in the central bank’s asset holdings, interest rates, and debt levels relative to GDP on economic activity in Japan. We find that both the expenditure and tax multipliers of Japan have fallen, implying that the effectiveness of fiscal policy in Japan declined following the change in monetary policy. Moreover, we find that the efficacy of quantitative easing is small, implying the need for huge interventions to have a significant effect on real GDP, and that the effectiveness of quantitative easing has declined since 2013. We argue that the reduction in policy multipliers can be attributed to the upward trend in the government debt level relative to GDP which, despite historically low interest rates, has increased Japan’s structural deficit, and the likelihood of reduced expenditures and higher taxes going forward.

Banking --- Banks and Banking --- Budget --- Budgeting & financial management --- Budgeting --- Central bank balance sheet --- Central Banks and Their Policies --- Central banks --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Currency crises --- Debt Management --- Debt --- Debts, Public --- Econometrics --- Economic & financial crises & disasters --- Economics of specific sectors --- Economics --- Economics: General --- Expenditure --- Expenditures, Public --- Finance --- Financial services --- Fiscal Policy --- Informal sector --- Interest rates --- Interest Rates: Determination, Term Structure, and Effects --- Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General --- Macroeconomics --- Model Construction and Estimation --- Monetary economics --- Money and Monetary Policy --- National Government Expenditures and Related Policies: General --- Public debt --- Public finance & taxation --- Public Finance --- Public financial management (PFM) --- Real interest rates --- Sovereign Debt --- Stabilization --- Tax expenditures --- Taxation, Subsidies, and Revenues: Other Sources of Revenue --- Treasury Policy