Policy Forum 8 (May 2019)

Olivier Blanchard - a prominent and leading macroeconomist of the past 2-3 decades and one of the world’s most respected macroeconomists - questioned in his recent speech at the annual American Economic Association Meeting the conventional wisdom that excessive debt is a danger for governments across the world. His central point is that, on average, during the past few decades, nominal interest rates have been lower than the nominal growth rate, which is quite the opposite of what is assumed in most of the textbooks on public finance. Therefore, debt is much less of a problem than previously thought. Blanchard, specifically speaks about the US economy; however, his point is perhaps even more relevant to the Chinese economy.

China has been experiencing a quite high economic growth rate over the past two decades, and at the same time, safe government bonds interest rates have been much lower than the GDP growth rate.  They are expected to remain below nominal growth rates for a long time, at least so long as the People´s Bank of China does not forget that low and stable inflation is the central goal of monetary policy. Price stability is indeed the optimal monetary policy emerging from the new generation of models that have become the workhorse for the analysis of monetary policy, which are called new Keynesian. Therefore, so long as the inflation rate in China remains low and stable and the economy continues to grow at its remarkably high and steady rate, the Chinese government should not worry too much with the supposed costs and risks of government debt, that the rest of the world has been too obsessed with in the past few years.

Read the full article (in English and Chinese)