IMF Working Papers

Did the U.S. Really Grow Out of Its World War II Debt?

By Julien Acalin, Laurence M. Ball

January 12, 2024

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Julien Acalin, and Laurence M. Ball Did the U.S. Really Grow Out of Its World War II Debt?, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The fall in the U.S. public debt/GDP ratio from 106% in 1946 to 23% in 1974 is often attributed to high rates of economic growth. This paper examines the roles of three other factors: primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951. Our central result is a simulation of the path that the debt/GDP ratio would have followed with primary budget balance and without the distortions in real interest rates caused by surprise inflation and the pre-Accord peg. In this counterfactual, debt/GDP declines only to 74% in 1974, not 23% as in actual history. Moreover, the ratio starts rising again in 1980 and in 2022 it is 84%. These findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.

Subject: External debt, Financial services, Fiscal policy, Fiscal stance, Inflation, Interest payments, Prices, Public debt, Real interest rates

Keywords: Financial Repression, Fiscal stance, GDP path, GDP ratio, Global, Inflation, Inflation expectation, Interest payments, Real interest rates, R-g, Surprise Inflation, U.S. Public Debt, World War II debt

Publication Details

  • Pages:

    55

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2024/005

  • Stock No:

    WPIEA2024005

  • ISBN:

    9798400262999

  • ISSN:

    1018-5941

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