Public Debt Levels and Real Interest Rates: Causal Evidence from Parliamentary Elections

Gabriel Ehrlich (), Owen Kay () and Aditi Thapar ()

No 2539, Working Papers from Federal Reserve Bank of Dallas

Abstract: We use close parliamentary elections as natural experiments to estimate the debt sensitivity of interest rates. Relative to an election in which one party barely secures a majority, an election in which no party achieves a majority causes the debt-to-GDP ratio to increase by 17 percentage points, while real interest rates rise by 99 basis points. If elections only impact real rates via debt, our results imply that a one percentage point increase in the debt-to-GDP ratio causes a 5.8 basis point increase in real rates, larger than most previous estimates and suggesting potential reverse causality from rates to debt.

Keywords: national debt; real interest rates; crowding out; regression discontinuity design (search for similar items in EconPapers)
JEL-codes: E62 H63 (search for similar items in EconPapers)
Pages: 78
Date: 2025-11-17
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:102173

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DOI: 10.24149/wp2539

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