1)Why is the US national debt necessarily a bad thing?

2)Where do the profits of state-owned banks go to in India, e.g. SBI - does it contribute to the fiscal deficit or does it add to government revenues?

3)Which econometric models do central bankers use when deciding macro-econometric policies, like interest rate hikes, QE or open market operations?

1)The US federal debt has swelled to nearly $22 trillion and the US government has been incurring sustained budget deficits. When there is an? economic slowdown or recession, it makes sense to increase government spending and this translates into budget deficits. However, when budget deficits are sustained through economic cycles, the federal debt increases and it results in crowing out of private sector investments.

To elaborate further, the private and household sector are the dynamic sectors of the economy. Any factor that negatively impacts the dynamic sectors is bad. When government debt rises and deficits are sustained, the government absorbs liquidity from the financial system and the cost of borrowing for the private sector increases. This translates into lower investment spending and hence weaker economic growth.

In addition, when government debt is huge (like in the United States), it needs to be serviced and repaid. Ultimately, the taxpayers have to bear the burden. If the government increases taxation to reduce debt or deficits, the consumer disposable income declines and impacts consumption spending. Therefore, higher debt ultimately impacts the private and household sector. Both these sectors are the growth trigger sectors of the economy.

2)The state owned banks such as SBI work as an independent entity and therefore, the profit earned by these banks not only goes in the hand of the government of India. These banks will keep a part of their profit as reserve to meet the future obligation and the remaining part of the profit will get distributed among the shareholder of the banks. The major part of the shares of state owned banks are owned by the government and therefore, the government gets a part from the total profit equivalent to their share in the banks. The government will add this profit into their receipts and therefore, this will help the government to reduce its fiscal deficit.

3)The open market operations econometric models used by central bank to decide the macro econometric policies. It is the purchase or sell of treasury securities in the open market. In the case of purchase of treasury securities, the central bank increases the money supply such that the rate of interest decreases that increases the investment. In the case of selling of treasury securities, the central bank decreases the money supply such that the rate of interest increases that decreases the investment.