Veřejná správa a sociální politika 2021, 1(2):45-68

PUBLIC DEBT AMIDST LOW INTEREST RATES: THE MAGIC PENTAGON AND ITS SIGNIFICANCE FOR ECONOMIC AND SOCIAL POLICY

Jan Mertl¹

¹ Department of Finance, University of Finance and Administration Estonská 500, 101 00 Praha 10

This article focuses on the new reality that has emerged after the financial crisis in 2008, when most European countries increased their public debt level, and the paradigm of relative indebtedness has prevailed in economic policy. Simultaneously, central banks applied the policy of
low interest rates both for stimulating the economy, but also to make the new higher levels of public debt sustainable. That was considered as a one-off event and new regulations were enforced so that it will not repeat. Recovery programs have been run so that the European countries will get out of debt traps by increasing GDP  and later having mild inflation targets. But new unexpected crisis struck again, this time aggregate supply side shock caused by Covid pandemics, which to some extent negated previous improvements and led to public debt increase again. Thus, we can see that we must deal with new paradigm of public debt, and we can consider whether the classic magic square of economic policy has not expanded to magic pentagon, the fifth element being the level of public debt, as it might be difficult to do monetary policy as it was possible when the indebtedness was seen primarily as absolute phenomenon and being able to repay in the long run. Also, the space for central bank’s interest rate adjustments might be limited when we consider the debt service changes caused by changing the interest rates. The article aims to explain these phenomena and discuss the ways how to deal with them, pointing out the main areas of social policy that can be influenced.

Keywords: public debt, monetary policy, social policy, money stock, magic square

Received: October 17, 2021; Revised: November 13, 2021; Accepted: November 18, 2021; Published: March 14, 2022  Show citation