The key question for macroeconomics today: Is it optimal to increase fiscal deficits?

In an environment of very low interest rates, it is tempting for many countries to conduct a more expansionary fiscal policy. But low real interest rates alone do not suffice for it to be optimal to conduct an expansionary fiscal policy and therefore increase the fiscal deficit and public debt. The low real interest rates must also reflect excess available savings over the profitable investment needs of the private sector. They may have other causes, in particular abnormally expansionary monetary policies. It is only if the level of private savings is high and the marginal return on capital low - and this explains why real interest rates are low - that it would be optimal to use a larger share of private savings to finance fiscal deficits. We show that neither the OECD’s or the world’s private savings rate nor the return on capital have a significant influence on the 10-year real interest rate, which depends merely on short-term real interest rates.