The IMF on the future of interest rates and managing high public debt

Public debt as a ratio to GDP soared across the world during the COVID-19 pandemic and is expected to remain elevated, posing a growing challenge for policymakers, especially in an environment of rising real interest rates. Whether real interest rates will remain elevated in the long run or converge back to pre-pandemic levels will have crucial implications for debt sustainability. But what will drive long-term real interest rates? And what are the best ways to reduce debt-to-GDP ratios?

PIIE hosted Jean-Marc Natal and Prachi Mishra of the International Monetary Fund (IMF) to confront these questions and discuss their two related chapters in the Fund’s forthcoming April 2023 World Economic Outlook. One chapter looks at the drivers of the natural rate of interest, the long-term anchor for real interest rates, and assesses its most likely future path and the implications for debt sustainability. The other chapter examines the most effective way to reduce debt-to-GDP ratios, considering fiscal consolidation, debt restructuring, and growth-enhancing policies.

A discussion with PIIE C. Fred Bergsten senior fellow Olivier Blanchard and PIIE senior fellow Joseph E. Gagnon and a Q&A session with the audience, moderated  by PIIE nonresident senior fellow Patrick Honohan, followed the presentation.