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Supposing, (entirely hypothetically, of course ;) ), that the UK government had taken on massive future debts (by spontaneously giving 2-3% of GDP to its citizens, in GBP, say.) immediately before a significant recession.

What would be the simplistic prediction of the impact on:

  • Interest Rates
  • Inflation

over the following, say, 20 years?


Obviously such situations are incredibly complex and there are numerous ways that the outcomes could be changed. But I want to get a feel for what the "base line" or "default" expectation might be.

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    $\begingroup$ This question without more details can’t be answered. What is significant? Usually increase in debt to GDP of 3% can be considered significant. Also how is the debt denominated? Is it in the country’s own currency? Is the debt in foreign currency? Also what you consider a major western government? US which enjoys an advantage of being the issuer of words reserve currency will be affected differently than UK. Debt also has different implications for any country inside monetary union. In addition making accurate forecasts over 20y horizons are impossible as policy and debt/GDP itself can change $\endgroup$ – 1muflon1 May 20 at 14:14
  • $\begingroup$ Shucks :( I was deliberately trying to keep things vague as I'm guessing that the other extreme of "What's going to happen to the UK InterestRate & Inflation as a result of CV + Brexit?" is going to be WAY to complex to deal with too. Do you think it's worth trying to find a middle ground question, here? Or is this concept doomed to failure? $\endgroup$ – Brondahl May 20 at 14:19
  • $\begingroup$ I think your question is interesting, but I also think it’s not well suited for SE format. A more narrow question could be for example “are there any forecasts of impact of covid on UK inflation/interest rate” (although if you care about 20y forecast that might be impossible). Or maybe if you care about fundamental relationships what is the relationship between debt and inflation and between debt and interest rates. Also the analysis with brexit and covid will be different - although they both can be viewed as negative shock to the economy their nature is not the same $\endgroup$ – 1muflon1 May 20 at 14:54
  • $\begingroup$ @1muflon1 Also the analysis with brexit and covid will be different - although they both can be viewed as negative shock to the economy their nature is not the same. Agreed. And I was also hoping to avoid any discussion of "will Brexit get delayed", "will Brexit cause a recession", etc. etc. :) $\endgroup$ – Brondahl May 20 at 14:57
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    $\begingroup$ I think the Q is not clear on if you want forecasts or theoretical predictions and relationships. Also before you clarified the question was too broad for the issues I explained in my 1st comment. Moreover, I was just giving you feedback based on my perception of the question for question to be closed you need to get several close votes and there are question where you find that 2-3 users voted to close but they remain open and get answers. I see some user upvoted your question so I suppose they thought it’s ok although I would recommend editing it to clarify/narrow it down $\endgroup$ – 1muflon1 May 20 at 15:17
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As asked, this question is too vague and open-ended. But the following statements seem safe.

  • The effect of a fiscal stimulus is to raise growth and expected growth. All else equal, the central bank would be expected to raise interest rates, and inflation would be slightly higher, but still should remain near target (or else the central bank is going to have to explain why it is failing in its inflation-targeting).
  • A recession is a reduction in growth. Inflation normally falls, and the central bank cuts rates.

The effects are in different directions, hence the net of the scenario is ambiguous.

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