Can governments get the nominal growth rate above the average interest rate?
We’re not persuaded that targeting higher inflation will do the trick. In part that’s for obvious reasons: it would require a wholesale abrogation of many of the institutional arrangements put in place over the past few decades – such as independent central banks and inflation targets – and the hard-won gains achieved through the disinflation period starting from the early 1980s. In part we’re skeptical because markets are seemingly awake to the risk: Most countries with high debt are already paying interest rates above expected nominal GDP growth. And markets demand a higher premium as debt increases. In the US there is a clear link between nominal GDP growth and the bond yield (and, with a lag, the average actual rate paid on the stock of public debt). As an additional complication, Dick Berner notes that in the US nearly half of budget outlays are now effectively indexed to inflation. How to push interest rates below nominal growth? Interest rates were below nominal growth rates in
