Debt, Deficits, and Interest Rates

Christopher Cotton

Current Policy Perspectives from Federal Reserve Bank of Boston

Abstract: This paper identifies how a rise in the deficit/debt impacts interest rates by looking at the high-frequency response of interest rates to fiscal surprises. The fiscal surprises are the unexpected components of deficit releases and the changes in official forecasts by the Congressional Budget Office and by the Office of Management and Budget. The paper estimates that a rise in the deficit-to-GDP ratio of 1 percentage point raises the 10-year nominal rate by 8.1 basis points. This is quantitatively similar for other Treasury maturities and for corporate debt interest rates. The paper also investigates which of the theoretical channels is driving this relationship and whether surprises are affecting interest rate expectations or the term premium. These results are used to estimate how recent spending proposals may affect interest rates.

Keywords: debt; interest rates; deficit; Ricardian equivalence (search for similar items in EconPapers)
JEL-codes: E43 E62 E63 (search for similar items in EconPapers)
Pages: 31
Date: 2021-12-23
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Debt, deficits and interest rates (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbcq:93543

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