Two possible solutions
Auerbach and Gale suggest that although in the short-term the US budget deficit seems manageable, the debt-to-GDP ratio is already quite high relative to historical norms and expected to rise significantly in the future. They note that for policymakers to ensure that by 2047 the debt-to-GDP ratio does not exceed its current level they would need to implement a combination of immediate and permanent spending cuts and/or tax increases totaling 3.2 percent of GDP.
The Fiscal Outlook in a Period of Policy Uncertainty
Authors: Alan J. Auerbach, William G.Gale
From: University of California, Berkeley – Brookings Institution
Elmendorf and Sheiner, on the other hand agree that the federal deficit is on an “unsustainable path” but suggest a different solution: increase federal investment, as the current low level of interest rates offers the opportunity for federal borrowing aimed at infrastructure and long-run investments, while enacting changes in federal spending and taxes that will reduce deficits gradually over time.
Federal Budget Policy with an Aging Population and Persistently Low Interest Rates
Authors: Douglas W. Elmendorf, Louise M. Sheiner
From: Harvard University – Brookings
Bianchi and Merloni use a neo-Keynesian model to show that lack of monetary and fiscal policy coordination in the presence of rising fiscal imbalances can be detrimental. In particular, they argue that “if the fiscal authority disregards the level of debt but the monetary authority insists that inflation will not be allowed to rise, the economy can enter a spiral of lower output, higher inflation, and higher debt.”
The Dire Effects of the Lack of Monetary and Fiscal Coordination
Authors: Francesco Bianchi, Leonardo Melosi
From: Duke University – FRB of Chicago
