The U.S. federal debt-to-GDP ratio has doubled since the Great Recession, highlighting the importance of understanding the relationship between this debt and long term interest rates. Previous work finds empirically that a one percentage point increase in debt leads to a two-and-a-half basis point increase in interest rates. This paper revisits these estimates and finds they are particularly sensitive to the assumption for ongoing fiscal policy leading to a potentially even smaller relationship. Further, the relationship may vary with different types of debt financed fiscal policy so we estimate if the elasticity varies with respect to three dimensions (i) whether the change in debt is due to a legislative or macroeconomic shock, (ii) whether the change in debt is due to a change in discretionary outlays, mandatory outlays, or revenues, and (iii) how much wealth inequality exists in the economy. Overall, the results point to a fairly small elasticity.

We analyze public debt policies within a calibrated stochastic OLG model with distortionary taxation. The risk-free interest rate is realistically sensitive to public debt and lower than the growth rate. The risky rate is substantially higher due to convenience benefits of public debt, idiosyncratic return risk, and aggregate risk. To discern fiscal and welfare perspective, we define and compare deficit-maximizing debt (DMD) and welfare-maximizing debt (WMD). Although free-lunch deficits can reduce tax distortions, DMD tends to exceed WMD. Both rise if the risk-free rate falls due to increases in risk or convenience benefits, but not necessarily if it falls due to lower growth or government spending. Taking market power into account barely changes DMD yet substantially reduces WMD. When wealth inequality is included, the middle class favors debt lower than the WMD in the representative agent case, whereas the rich favor much higher debt-to-GDP ratios.

We study the link between the evolving age structure of the working population and

unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the considerable extent to which demographic changes over the last 30 years contribute to the decline of unemployment rate. Our findings have important policy implications given the expected aging of the working population in Europe. Furthermore, lowering inflation volatility is less costly in terms of higher unemployment volatility. It suggests that optimal monetary policy is more hawkish

in the older society. Our results hint also at a partial reversal of the European-US

unemployment puzzle due to the fact that in the US the share of young workers is

expected to remain robust.

After the Global Financial Crisis, productivity growth in many Euro Area countries fell behind non-Euro EU and other developed countries. While various explanations have been put forward, little has been said on the role of the Euro in decelerating recovery from exogenous shocks. Many prior applications of the synthetic control method (SCM), suitable to analyze the productivity impact of the Euro, have excluded crises altogether, made false assumptions or violated other underlying requirements. With a transparent and manipulation-free SCM application to Finland, results reveal the inability of this previously highly competitive economy to recover from exogenous shocks and restore prior productivity growth despite the implementation of various remaining available policy measures. Extensive robustness checks confirm a huge welfare loss.