[dchmiel]

You're right on that dynamically it is a very interesting problem and something that from my exposure to economics, economists seem to spend very little time analyzing.

Changes beget other changes and so on. Finding the steady state level of change would be challenging yet interesting to model.

[yetanotherphd]

I have a PhD in economics and that is the first thing that an economist would think of (in my case it wasn't, but I did eventually realize it...).

One reason why many of the the "crazy" ideas posted on HN don't make it to policy, is that there are people trained in economics who are able to see the flaws in such policies.

EDIT: and in case you were curious, this wouldn't generally be considered a dynamic problem in economics. Once the policy was announced, interest rates would immediately change to a new equilibrium, which accounted for people's higher tendency to default. So the problem is simply to calculate the new static equilibrium.

[jerf]

Yes, in this case I merely mean to bring in the idea that changes are reacted to. I was using static vs. dynamic more in the physics sense, where "static" can be looked at as a snapshot of the system you're looking at, whereas dynamic brings in the concept of time. I agree that all else being equal, there's every reason to believe that this sort of change would produce a new static equilibrium, at least in terms of debt itself. (My doubt is more about the net effect on the economy as a whole, as debt seems to be a matter of some debate even today. The dominant economic thought seems to be pretty comfortable with it, I have to admit I'm coming around to more of a "Black Swan" sort view where I think the dominant consensus is overvaluing it, which interestingly also accords with a lot of historical thinking on the topic albeit not with that amount of mathematical backing.)

[yetanotherphd]

We usually call the immediate effect (in this case on interest rates) partial equilibrium, and the "full" effect including all flow on effects, "general equilibrium". And there are models which include dynamic and random effects (dynamic stochastic general equilibrium - DSGE - models). Can't tell you much about them apart from the name :-)

Anyway it seems like messing with debt contracts is a bad way to change the interest rate, if that's all you want to do, since that is precisely the lever that the Federal Reserve controls anyway.