Public debt and the world financial market
Revue de l'OFCE
RAGOT Xavier - Observatoire français des conjonctures économiques (Auteur)
PINOIS Ricardo - Observatoire français des conjonctures économiques (OFCE) (Auteur)
Paris : Presses de Sciences Po
165 - 189 p.
Mots clés
Public debt, World financial market
World public debt has increased by 30% of world GDP between 2007 and2017. During the same period, the real interest rate on public debt has fallenby roughly 200 basis points, whereas it should have increased by 100 basispoints according to previous estimates. It reveals that demand for public debthas increased faster than supply. Where does the increase in savings comefrom? To answer this question, we construct the world financial marketequilibrium to identify the country and agents across countries who increasedtheir saving rate. Using the equality between the sum of private and publicsaving and investment at the world level, we find four lessons. First, the worldinvestment rate has been slightly increasing during the period, with animpressive shift of investment to China. The investment rate of China was 4% of world GDP in 2007. It jumps to 12% in 2017. Second, during the period, the world experienced an impressive reduction of global imbalances. The Chinesesaving rate increased less than Chinese investment and the US saving rate increased more than US investment. Third, the increase in the world saving rate comes from highly indebted countries before 2007, mostly from the US and southern Europe. The increase in the current account of Italy, Spain and Greece (from a negative territory) is the order of magnitude of the increase in the US current account. Fourth, there is no clear relationship between the householdsaving rate and national government borrowing, thus not confirming the Ricardian equivalence view. Finally, it seems that the factors generating a highnet saving rate in China are temporary, whereas the deleveraging of US andsouthern Europe may be long-lasting. As a consequence, one can expect lowinterest rates for a long period of time.