Government borrowing raises interest rates?

 

Numerous economists are less than entirely as to when government borrowing raises interest rates and when it doesn’t, for example the four economists pictured above in this SUERF article (2019). The economists are Elga Bartsch, Jean Boivin, Stanley Fischer, Philipp Hildebrand. They claim that “With global debt at record levels, major fiscal stimulus could raise interest rates…”. (Article title: “Dealing with the next downturn….”)

Perhaps I can clarify matters.

If a government relies exclusively on fiscal stimulus, a scenario the above authors consider, then it might seem that the extra borrowing needed “could raise interest rates”. But wait: if extra stimulus is needed then the central bank is not going to let interest rates rise!!!  Put it another way, it will simply QE most if not all the extra government bonds.

And what do you know? Since the above article was published, Covid has arrived and governments have done even more borrowing than the above authors probably envisaged. Lo and behold: central banks have QEd most of, indeed pretty much all of the additional government bonds!