Should we keep interest rates low at the risk of increasing inequality?

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CHRONIC. ILow-income households mainly hold simple financial assets, linked to interest rates, while wealthy households mainly hold risky assets.

By Patrick Artus*

IA return to real interest rates higher than the real growth of the economy would have very harmful effects. First, on the sustainability of public debts. When the real long-term interest rate is lower than the real long-term growth of the economy (which has been the case since 2011 in the United States and since 2015 in the euro zone), the sustainability of public debt is consistent with maintaining a primary budget deficit (excluding interest on the public debt).

The allowable primary public deficit is equal to the product of the public debt ratio and the difference between real growth and the real long-term interest rate. Thus, from 2016 to 2019, the real long-term interest rate was 2 points lower on average in the United States and in the Eurozone…