In a simple world of full Ricardian Equivalence, households increase their savings by the present value of future taxes needed to repay government debt. Their desired bond holdings thus rise by the exact increase in government debt issuance. Private consumption declines to offset the increase in public expenditure, leaving GDP unchanged. The long-term interest rate therefore remains constant. 5 In this stylised view, changes of the government debt/GDP ratio should not affect the future path of interest rates, nominal or real, in any way at all. A related perspective is that higher government debt/GDP ratios would tend to increase the.
