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Livio: "How a federal balanced budget law proposes to deal with this empirical weight of history is an interesting question."

Yep. If NGDP is growing over time (at say 2% inflation + 3% real = 5%), then you need to run a deficit equal to 5% of debt/NGDP to keep the debt/NGDP ratio constant over time.

Just doing my own post on this balanced budget law. The two posts should complement each other.


You mean 5% of *debt*, not debt/gdp. Apart from that, exactly what I was going to say. This is why the big deficits in the 70s were harmless for debt/gdp. Good post Livio.

K: Yep. But the deficit/NGDP ratio would be 5% of the debt/NGDP ratio.

Suppose the govt. runs a balanced budget *before interest payments* (i.e. the "primary" surplus is zero.)

The debt then increases at rate r = the interest rate on the debt.
GDP grows at rate g.

So our debt to GDP falls even if
(a) we run a (small) deficit, and
(b) r is not too much above g.

Anyone feel up to giving us a time-series of r-g for Canada? (both real or both nominal, as you like)

There's a lovely analysis for the US by Ball, Elmandorf and Mankiw, but I'm not familiar with the Canadian data.

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