“When the facts change, I change my mind. What do you do, sir?” (a statement typically attributed to Keynes, but without hard proof that he actually said it...). This book was indeed triggered by facts changing, namely by the steady decrease in real interest rates which started in the mid-1980s. Over time, I came to the conclusion that this was a fundamental change, one that was likely to last, and one that forced us to rethink the role of fiscal and monetary policy.
The purpose of this book is to focus on the implications of low rates for fiscal policy, to review the theory and the evidence, and draw practical implications for policy in advanced economies today.1
My target readers are primarily policy makers and their staff, who have to navigate complex waters over the coming years. They are the ones I want and need to convince. The main challenge in discussing fiscal policy is the widely held and nearly religious belief that public debt is very bad. You can see this book as an attempt to take a richer and more balanced position. Not to love debt, but to understand when and how to use it.
The book is more of an essay than a treatise. There are still many questions to which I do not have a full answer, and some to which I am not even sure I have the right answer. The discussion of the issues covers a wide range of complex and often unsettled macroeconomic issues, from dynamic inefficiency, to the source of the equity premium, to the way quantitative easing works (or does not work), to the nature of sudden stops, to the size of multipliers. I have tried to identify the zones of uncertainty or disagreement. I have tried to explain things simply in the text, being more precise in boxes: some will find the treatment too difficult, and others, too superficial. So be it.
Thanks are due to an unusually large number of people.
First, my co-authors on fiscal policy issues throughout the years, Rudi Dornbusch, Stanley Fischer, Roberto Perotti, Francesco Giavazzi, Alvaro Leandro, Daniel Leigh, Giovanni Dell’Ariccia, Jean Pisani-Ferry, Arvind Subramanian, Takeshi Tashiro, Jason Furman, Angel Ubide, Jeromin Zettelmeyer. Special thanks are due to Larry Summers; our discussions over nearly five decades have been always illuminating.
Second, to the many people who have offered suggestions and made comments on the first draft of the book, Silvia Ardagna, Agnes Benassy-Quere, Lorenzo Bini-Smaghi, John Cochrane, Peter Diamond, Carlo Favero, Olivier Garnier, Joe Gagnon, Vitor Gaspar, Jose de Gregorio, Patrick Honohan, Martin Hellwig, Gerhard Illing, Larry Kotlikoff, Arvind Krishnamurthy, Paul Krugman, Bas Jacobs, N. Greg Mankiw, Philippe Martin, Atif Mian, Emi Nakamura, Maury Obstfeld, Jean Pisani-Ferry, Roberto Perotti, Adam Posen, Jim Poterba, Xavier Ragot, Ricardo Reis, Klaus Regling, Chang Yong Rhee, Antonio Spilimbergo, Coen Teulings, Paul Tucker, Angel Ubide, Annette Vissing-Jorgensen,Etienne Wassmer, Christian von Weizsacker, Jakob von Weizsacker, Ivan Werning, Charles Wyplosz. Special thanks to David Wilcox, who read the manuscript line by line and made it much better.
Third, to the people who accepted to be part of a reading group, a group which included many of my colleagues from the Peterson Institute for International Economics, including, in addition to those already cited, Jacob Kirkegaard, Madi Sarsenbayev, together with Kyoung Mook Lim, John Seliski and Michael Falkenheim from the Congressional Budget Office, Daniel Leigh and Raphael Espinosa from the International Monetary Fund. I also thank the two anonymous referees who reviewed the book for MIT Press.
Fourth to the many people who offered comments on the draft of the book available on the MIT Press open source, among them Vivek Arora, Michael Ben-Gad, Johannes Brumm, Francesco Franco, Egor Gornostay, Yusuke Horiguchi, Richard Katz, Michael Kiley, Galo Nuno, Gabriel Patterson, Atanas Penakov, Jemima Peppel-Srebrny, John Quiggin, Lars Svensson, Gian Maria Tomat, Charles-Henri Weymuller, Stavros Zenios (I cannot thank MIT Press enough for providing such a free open site; not only has it increased the early visibility of the book and helped contribute to the current debate and policy decisions, but many of the comments pointed to mistakes or contributions I was unaware of, and which I can correct in the final draft).
Fifth, to an outstanding group of research assistants on this and earlier related projects, Gonzalo Huertas, Michael Kister, Julien Maire, and Thomas Pellet.
Sixth, to Adam Posen and the Peterson Institute for International Economics, which has provided me with a great working environment.
Seven, to Noelle, who has allowed me, once more, to obsess about the book and ignore all other tasks.
As usual, all mistakes are mine. And all the loose ends naturally determine my future research agenda...