Fiscal Policy under Low Interest Rates

Translated from the English by Daniil Shestakov. – Moscow: Gaidar Institute Press, 2025. – 264 p.

ISBN 978-5-93255-702-0

Policymakers in advanced economies are facing an unusual fiscal environment: public debt ratios are historically high, and interest rates are almost certain to fall back to very low levels once inflation is under control. This combination calls for a rethinking of the role of fiscal and monetary policy – and this is just what Olivier Blanchard proposes in his book.

Opinions differ on how fiscal policy should be conducted. Some, pointing to the high debt levels, make debt reduction an unconditional priority. Others, pointing to the low interest rates, are less concerned about public debt: in their view, fiscal space remains available and, if there are compelling reasons, further increases in debt should not be ruled out. Blanchard argues that low interest rates reduce not only the fiscal but also the social costs of public debt. At the same time, he shows that low rates reduce the room for maneuver for monetary policy – and therefore increase the benefits of using fiscal policy, including deficits and debt growth, for macroeconomic stabilization. In other words, low rates mean lower costs and greater benefits from public debt growth.

Blanchard describes what optimal fiscal policy should look like and considers three practical examples: fiscal consolidation after the global financial crisis, the sharp rise in public debt in Japan, and the current combination of fiscal and monetary policy in the United States. His conclusions will be of interest to economists, policymakers, and bankers in all countries.