Countries Risk Overestimating Debt Capacity, Jackson Hole Paper Shows.

Governments in developed countries, including the US, may be underestimating the impact of their debt due to central bank asset purchases, according to a paper presented at the Federal Reserve's annual gathering. The authors argue that these asset purchases have muted the effect of deficit spending on bond prices, potentially leading governments to overestimate their fiscal capacity. They describe a risky debt regime in which governments issue large amounts of debt unfunded by taxes, forcing bondholders to reprice securities. Concerns about fiscal dominance have grown in the US following the Covid-19 pandemic, as government borrowing increased significantly. [Extracted from the article]