Did the U.S. Really Grow Out of Its World War II Debt? /
Julien Acalin, Laurence M. Ball.
- Cambridge, Mass. National Bureau of Economic Research 2023.
- 1 online resource: illustrations (black and white);
- NBER working paper series no. w31577 .
- Working Paper Series (National Bureau of Economic Research) no. w31577. .
August 2023.
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.
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Price Level • Inflation • Deflation Interest Rates: Determination, Term Structure, and Effects Studies of Particular Policy Episodes General Debt • Debt Management • Sovereign Debt