High Public Debt in an Uncertain World: Post-Covid-19 Dangers for Public Finance

Key messages:

High debt ratios represent a danger, even if interest rates are low.
The key reason is increased uncertainty of growth prospects in a post-Covid economy coupled with and uncertainty with regard to the probability of future large shocks.
Large negative shocks are more frequent than assumed in standard models.
Another reason is that the cost of public debt might increase more than linearly as the debt ratio rises.
Large negative shocks create much more problems when debt is already high.