INTEREST RATE AND INCONSISTENT FISCAL BALANCE: notes from a closed economy model

Abstract

The increase in interest rates is seen by many academics and financial analysts as a bitter medicine, but necessary to face certain problems in an economy. This paper problematizes this judgment, drawing attention to the complex relationship among interest rates paid by the government, fiscal balance and economic growth. For this, based on identities of the national accounts, it builds a model of a closed economy, where it explains that raising the interest rate requires, in order to maintain fiscal balance, not the reduction of public spending, but a greater volume of investment. The contribution of the paper is to propose an equilibrium condition, starting from the simplicity of the equations and the graphical representation of the conclusion.