Open Access Journal Article

Fundamental character of the risk premium to influence the sustainability of the public debt

by Séverine Menguy a,* orcid
a
Faculté Société et Humanités, Université Paris Cité, Paris, France
*
Author to whom correspondence should be addressed.
JEA  2023 2(1):21; https://doi.org/10.58567/jea02010008
Received: 1 March 2023 / Accepted: 24 March 2023 / Published Online: 25 March 2023
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Abstract

Traditionally, conditions of sustainability of the public debt have long been related quite exclusively to fiscal policy and to budgetary parameters. However, the interaction between fiscal and monetary policies regarding the fixation of the interest rate is fundamental. Indeed, a simple analytical modelling shows that if the nominal interest rate increases exponentially with the public debt, because of a default (credit) risk premium, if the confidence of investors is fundamental, conditions of sustainability of the public debt could be much more difficult to comply with. Indeed, if the interest rate is risk-free, values for which the public debt can be sustainable are less constraining if the long-term GDP growth rate is high, or if the long-term risk-free nominal interest rate is small. They are also less constraining if the country decides to turn to a non-negligible primary budget surplus in case of a high public debt. However, if the interest rate exponentially increases with the public debt level, in case of a significant importance of the default (credit) risk premium, these parameters have very limited consequences on sustainable and equilibrium public debt levels. The sustainable public debt that a government should target is then much smaller than in absence of this risk premium.

Keywords: Interest rate; Risk premium; Public debt; Debt sustainability;
Copyright: © 2023 by Menguy. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
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ACS Style
Menguy, S. Fundamental character of the risk premium to influence the sustainability of the public debt. Journal of Economic Analysis, 2023, 2, 21. https://doi.org/10.58567/jea02010008
AMA Style
Menguy S. Fundamental character of the risk premium to influence the sustainability of the public debt. Journal of Economic Analysis; 2023, 2(1):21. https://doi.org/10.58567/jea02010008
Chicago/Turabian Style
Menguy, Séverine 2023. "Fundamental character of the risk premium to influence the sustainability of the public debt" Journal of Economic Analysis 2, no.1:21. https://doi.org/10.58567/jea02010008
APA style
Menguy, S. (2023). Fundamental character of the risk premium to influence the sustainability of the public debt. Journal of Economic Analysis, 2(1), 21. https://doi.org/10.58567/jea02010008

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