“A full-throated defense of economic dynamism.” - The Wall Street Journal
“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
AI Summary.Across countries and over time, higher public debt burdens are associated with lower relative returns on government bonds, the opposite of standard risk-premium predictions. The authors estimate financial repression—making banks captive bond buyers and loading them with low-return reserves—contributed 90.7 percentage points of GDP to Britain's postwar debt reduction, versus 20.3 from surprise inflation.
Marijn Bolhuis, Jakree Koosakul, Neil Shenai, and Jie YangInternational Monetary Fund
Date Posted:
Historically, sovereign yields fell relative to private returns as debt rose, driven by liquidity and portfolio rules creating captive buyers for government liabilities. Peaking in WWII, such financial repression may return as debt rises.
How do governments reduce high public debt burdens without inflation or surpluses?
Core argument: Financial repression contributed an estimated 90.7 percentage points of GDP to Britain's debt reduction in 1945–55, versus 20.3 points from surprise inflation and 3.9 points from primary surpluses.
Across countries and over time, higher public debt burdens are associated with lower relative returns on government bonds—the opposite of what standard risk premium models would predict (Figure 1a). At postwar peaks, relative yields fell to about −4% in Britain as debt neared 250% of GDP and −3% in the US; Japan later repeated the pattern (Figures 1b–d). Fiscal repression makes banks captive bond buyers; monetary repression places low-return reserves on their balance sheets (Table 1). Both indicators peaked after WWII, fell with liberalisation, and rose after the GFC (Figure 4). Repression contributed an estimated 90.7 percentage points of GDP to British debt reduction in 1945–55, versus 20.3 from surprise inflation and 3.9 from primary surpluses (Table 3; Figure 11). Cumulative savings averaged 9.8 points of GDP across advanced economies in 2008–20 (Table 3).
Takeaways by Macro Roundup® AI
Financial repression contributed an estimated 90.7 percentage points of GDP to Britain's debt reduction in 1945–55, versus 20.3 points from surprise inflation and 3.9 points from primary surpluses.
Higher public debt burdens are associated with lower relative returns on government bonds across countries and over time, the opposite of standard risk premium predictions, with postwar relative yields falling to about −4% in Britain as debt neared 250% of GDP and −3% in the US.
Fiscal repression makes banks captive buyers of government bonds while monetary repression places low-return reserves on bank balance sheets; both indicators peaked after WWII, fell with liberalisation, and rose after the global financial crisis, with cumulative savings averaging 9.8 points of GDP across advanced economies in 2008–20.
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